T+1 settlement: What you need to know

Posted: 21/10/2023 | Read time: 3 minutes

In the first of a blog series on T+1, AutoRek’s Senior CASS Consultant Murray Campbell talks through the new settlement changes in the US, anticipated changes in the UK, and what firms can do to ensure they are ready.

Over the last 40 years, we have seen the shortening of settlement timeframes for trades and transactions as technological advancements allow money and securities to be exchanged faster.

Now under review again, global financial centres are shortening the standard settlement period to one day. This will have a material impact on all market participants.

Here’s what US and UK firms should know about the move towards T+1 settlement:

What’s the current settlement period?

Since 2014 in the UK – and 2017 in the US – the settlement period has been two business days after the trade date – known as T+2. In these two days, both firms involved in the trade carry out post-trade activities to prepare for settlement.

What are the latest T+1 developments in the US?

In February 2022, the Securities Exchange Commission (SEC) proposed changing the standard settlement period from T+2 to T+1. It stated:

“The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors.”

The SEC reconsidered its position due to high transactional volumes and market volatilities during the COVID-19 pandemic and so-called “meme” stock trading. Longer settlement periods result in a higher volume and value of outstanding, unsettled trades. This presents a risk to firms and consumers.

The proposed rule change was finalised in March. The Exchange Act Rule 15c6-1(c) requires firms to enter into transactions that settle on a T+1 basis, and the SEC expects firms to comply from May 2024. So, firms trading on US markets have less than a year to prepare for T+1 settlement.

How can US firms prepare for T+1?

Having one full day between the trade and settlement dates allowed firms time to perform necessary post-trade activities. Under T+1, however, firms won’t have the same luxury. They must understand how this will impact them – and ensure they can complete the required processes efficiently.

What are the latest T+1 developments in the UK?

The UK is evaluating the change towards T+1. As part of the Edinburgh Reforms, the UK created an Accelerated Settlement Taskforce in December 2022 to consider the implications of shortening the settlement cycle. It’s expected to provide initial feedback in December 2023. The final report and recommendations are expected in December 2024.

Market participants are invited to provide views on the possible change. So, if you have strong opinions on T+1 and best practices, take this opportunity to state them.

The taskforce has set the following key objectives:

• Assess the costs and benefits of making the change to T+1
• Consider the challenges for accelerated settlement and how they can be addressed
• Review how well-placed the UK financial services industry is to make the change

The UK must remain a major financial centre. Keeping pace with trade settlement is an integral part of that, which suggests the UK will likely reduce the settlement period too.

How can UK firms prepare for T+1?

UK firms trading on US markets must also comply with the SEC rule change when it comes into effect. So, firms should prepare for this change while monitoring progress in the UK.

As a starting point, firms should consider their post-trade processes and identify where they might face challenges in complying with T+1 settlement.