T+DONE? – An Examination of the US Transition to T+1.

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The US financial markets underwent a significant change on 28 May 2024, transitioning from a T+2 (Trade date +2 days) to a T+1 (Trade date +1 day) settlement cycle. This shift, driven by technological advancements and a desire to align with the global trend of settlement acceleration, has significantly impacted the market. Let’s delve into the pros and cons of this transition.

The Pros of the US shift to T+1 Settlement

Reduction in Counterparty Risk

The move to T+1 has been beneficial from a market and counterparty risk perspective. By reducing the time between the trade date and the settlement date, the exposure to counterparty risk is significantly minimised.

Unlocking Liquidity

The transition to T+1 has unlocked previously tied-up liquidity in the US settlement process. This has increased capital efficiency and reduced funding costs tied to the collateral and margin that must be held against open trades under the T+2 settlement cycle.

Streamlining Financial Transactions

The shift towards T+1 settlement has streamlined financial transactions allowing traders and investors to benefit from more timely execution in relation to US equities. The move has required firms to optimise and automate processes to meet the new timeframe, this has led to overall improvements to post-trade processes and general market infrastructure across the board.

The Cons of the US shift to T+1 Settlement

Operational Challenges

The move to T+1 has put pressure on back-office operations. The compressed settlement cycle demands that operational risk is mitigated. Any manual processes immediately come under pressure, as automation becomes a prerequisite for a T+1 environment.

Increased Pressure on Smaller Players

The transition has been particularly challenging for smaller regional banks, agency broker-dealers, and niche firms. These entities have faced significant challenges in improving their pre-settlement efficiency before the May 2024 go-live date.

Potential Increase in Settlement Fails

The compressed timescale could increase settlement fails through an inability to meet deadlines for matching and funding. This could lead to increased operational risks.

 

What we’re seeing at GPP

“The main issue of concern for GPP was US$ liquidity on rebalancing, but so far, our concerns have not been realised. In fact, we’ve seen practically zero impact since the US transitioned to T+1 settlement, with average fail rates remaining below the benchmark 15% rate.

Some clients have struggled with the operational impact related to the necessity for faster processing turnaround. This is an industry-wide challenge for those with less sophisticated operational structure, but the T+1 initiative has forced firms to take a closer look at Straight Through Processing (STP) rates/capabilities.

This has had a positive effect across the board, and we hope to see further improvements as the demands of T+1 from an affirmation perspective become more in focus, and the US Broker community ramp up their efforts to comply’’.

Tim Coxhead

Head of Clearing & Custody Ops

 

Conclusion

The transition to T+1 settlement in the US equities markets has been a major step towards more efficient markets and improved investor confidence. However, it has also introduced new challenges, particularly for smaller players and back-office operations.

As the industry continues to adapt to this new landscape, it will be interesting to see how these challenges are addressed and what further impacts this shift will have on the global financial markets.

Disclaimer:

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