In May 2024, the settlement of listed securities on US, Canadian, Mexican, and Argentinian markets shortened to T+1. This change was the focus of intense preparation for Investment Managers globally, as it impacted approximately two-thirds of the world markets. There were fears that the change to T+1 settlement would cause major disruption to trading and settlement. While this has not come to pass, it does not mean there has not been a significant impact on markets. This article investigates the issues resulting from the change to T+1 settlement in North America and what happens next with T+1 worldwide.
The US SEC announced the move to T+1 settlement in February 2022, to be effective from May 28th, 2024. This was a short implementation period for both sell-side and buy-side market participants who launched major projects to achieve readiness for May 2024. Investment Managers reviewed their Middle Office trade operations and implemented workflow and technology enhancements to increase automation. Managers also put hyper-care support around trade operations for May 2024, driving the adoption of existing automated processing, communication and liquidity solutions. This combination of actions not only minimized the immediate impact of the T+1 change, but it also increased the rate of straight-through processing, on-the-day affirmations, and decreased trade failures, bringing benefits beyond the original aims of Regulators. DTCC analysis found that on-the-day affirmations of listed trades had increased from 73% prior to T+1, rising to 95% post T+1 with reduced market liquidity risk as a result of decreased pre-settlement risk.
Since May 2024, some negative impacts from the adoption of T+1 in North America have emerged. Hyper-care that was intended to be short term has, in many cases, become long lasting, requiring additional headcount in Trade Operations at additional cost. There is also evidence of an unanticipated “clumping” of trades on Thursdays, to avoid the costs of financing over weekends. This clustering of trade activity may be driving up prices for in-demand assets and increasing counterparty risk. Non-US managers, including EU and UK managers, have also reported increased transaction charges due to the higher cost of FX coverage and cost of funding to cover the “mismatch” of investor and trade flows that are impacting overall fund returns.
Other regulators worldwide have been observing how T+1 has been embedded in North America. There is a general movement across regulators to adopt T+1 long term, given the reduction in risk for liquidity and settlement, reduction in margin and collateral requirements, as well as the desire for global alignment in markets and trading:
The UK Accelerated Settlement Taskforce (AST), reviewing T+1, recommended in October 2024 for adoption of T+1 by 2027. ESMA recently recommended aligning with the UK on 2027. The Australian ASX has also commenced consultation and aims to adopt T+1 in the long term. In Singapore, MAS continues to monitor T+1 adoption globally but has indicated that it is unlikely to consider adoption until it is required in most developed markets. Discussions regarding T+0 (same day settlement) or “nuclear settlement” (instantaneous) are also being mentioned but remains a more distant prospect-
For Managers, the change to T+1 continues to drive the adoption of existing solutions and automation in trade support and liquidity. It has also prompted Managers to review their fund settlement cycles towards T+1 to better align investor flows with trading in the market. Changes to fund settlement represent a complex operational change that require careful planning in their own right.
How can Alpha help?
Alpha FMC has a wealth of experience helping clients optimse both trade processes and Transfer Agency processes, including fund settlement. Wehave a proven track record of successfully helping clients adopt technology solutions to drive efficiency, realizing operational benefits quickly, pragmatically, and sustainably.
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About the Author
Conor McKenna
Conor is a member of the Alpha Operations Practice with over 20 years of experience working both in industry with Aberdeen Asset Management and Railpen and as a management consultant at PWC Consulting and KPMG.
He has worked across the public and private markets value chain, demonstrating the ability to identify, assess and successfully align strategic, operational and regulatory drivers and risks and to identify and accommodate disparate stakeholder priorities to deliver transformation, integration and implementation projects.
Conor has extensive experience designing and implementing operating model transformations, regulatory changes, and system and provider selection and implementations.