The USA, Canada and Mexico transitioned to T+1 settlement for securities on the weekend of 25-27 May 2024. The movement from trade date plus two days settlement ('T+2') to trade date plus one day settlement ('T+1') was mandated by the SEC to 'promote investor protection, reduce risk and increase operational and capital efficiency'. It was prompted, by periods of market volatility, including those driven by 'meme stock' trading in 2020 and 2021, that highlighted potential vulnerabilities in the US securities market.
India has moved to T+1 for equities in a phased approach since February 2022 and China has operated T+0 for many years. But the North American transition has prompted other jurisdictions to consider whether they should also mandate a transition to T+1. This article explores the status of transition worldwide and what firms should be considering as the number of jurisdictions transitioning gathers pace.
The UK
The UK Accelerated Settlement Taskforce was set up by the UK government in December 2022 to examine the case for the UK to move to T+1 settlement. The initial report (PDF 545 KB), published in March 2024, recommended that the UK should commit to moving to a T+1 standard settlement cycle at the latest by the end of 2027. Principle reasons included harmonisation with international markets, improving market resilience and reliability, reducing market and credit risk and associated costs, and incentivising the automation of most post-trade processes.
The report recommended that, irrespective of the migration date to T+1, appropriate operational changes, such as market standards for allocations and confirmations and electronic processes for exchanging standard settlement instructions (SSIs), should be mandated with effect from a date in 2025 to help prepare the market for T+1.
The report also suggested that the UK should engage with other European jurisdictions to see if it is practical to align with their moves to T+1.
The UK government accepted the recommendations and has established an Accelerated Settlement Taskforce Technical Group to determine the detail of the technical changes. KPMG in the UK is secretariat to the Technical Group.
Challenges identified by the initial report include:
- misalignment for securities that can settle in both UK and EU markets, if the EU transitions at a different time
- misalignment with the various different types of fund subscription/creation and redemption/cancellation cycles
- likely increase in FX funding costs due to reduced time to agree and settle corresponding FX funding trades
- compression of time to execute and settle inventory management trades such as stock lending, recalls and collateral
- compression of time to execute operational processes.
The report also recognised that there would be a cost to the significant technology upgrades that would be needed and an initial increase in settlement fails. However, in the long term, it recognised that automation of processes would both reduce costs and settlement fails.
The report identified that the key regulatory change needed would be to amend the UK Central Securities Depositories Regulation (CSDR) to mandate a maximum settlement cycle of one business day for settlement of transactions executed on a UK trading venue. UK CSDR could also be amended to mandate the matching, allocation and confirmation of transactions on the trade date and to mandate electronic SSIs. CSD rulebooks, trading documentation and industry best practice guidelines may also need to be amended to ensure a smooth transition.
The Accelerated Settlement Taskforce Technical Group continues to work through the challenges and corresponding changes needed and is due to publish recommendations by the end of 2024.
The EU
ESMA is mandated by CSDR Refit to report to the European Commission on the cost, benefits and impacts of shortening the EU settlement cycle as well as a detailed outline on how to move to a shorter settlement cycle. To collect stakeholder views and evidence for this report, ESMA launched a 'Call for Evidence' in October 2023.
The feedback was published by ESMA in March 2024. It found that the harmonised moving of the EU from T+2 to T+1 would reduce by 80 to 90% the available time for post trading processes. This would pose most challenges to securities borrowing and lending, repo, FX trading and cross-border activities. However, ESMA concluded that some of the operational challenges highlighted, such as lack of automation, should be worked on to improve settlement efficiency regardless of the length of the settlement cycle.
ESMA has also noted that a number of respondents remain unconvinced of the positive balance between costs and benefits of the transition. This may be because it is easier to identify the immediate costs (e.g. technology upgrades, standardisation, human resources) rather than some of the longer term benefits (e.g. freeing up regulatory capital, innovation, competitiveness).
ESMA's preliminary analysis of feedback suggests that that an eventual transition to T+1 could take place no earlier than 32 months from the date industry is informed that the change needs to happen. However, this may not be ESMA's final position. And ESMA noted the requests from industry to coordinate with the UK and Switzerland in shortening the settlement cycle.
ESMA needs to report to the European Commission by 17 January 2025.
Other markets
The Swiss markets supervisory authority has not formally announced any consideration of the Swiss markets move to T+1. However, trade bodies and organisation such as Asset Management Association Switzerland and the Swiss Finance Council are calling for a move to T+1 in the Swiss market to align with other markets.
The Australian Stock Exchange (ASX) released a whitepaper (PDF 6.5MB) in April 2024 to gather industry feedback on moving to T+1 settlement in Australia. ASX aims to publish a summary of feedback in August 2024 including suggested next steps.
Implications
Indications are that although other jurisdictions recognise the costs of following the US to T+1 settlement, the risks and costs of misalignment with the US and the long-term gains of shortening the settlement cycle will prompt a worldwide movement to T+1. However, the timetable is not yet clear and is likely to be spread over at least the next three to five years.
The move to T+0 is also being considered, especially in the light of technological developments such as distributed ledger technology. However, the current consensus, given the technological changes and operational changes needed (such as the elimination of netting), is to phase the move to T+0 after a successful move to T+1. Changes in systems and processes should be made with consideration of an eventual move to T+0.
Market participants should prepare for the upcoming T+1 transitions in an informed and strategic manner. Firms should identify and plan sustainable change that can bring long term efficiencies to the settlement processes and therefore reduce risks and costs, no matter the length of the settlement cycle.
How KPMG in the UK can help
As the Secretariat to the UK Accelerated Settlement Taskforce Technical Group, KPMG has in-depth knowledge of the challenges that transition to T+1 settlement will pose to the UK and other markets. Alongside this knowledge, KPMG professionals can leverage the KPMG Connected Operations Framework, a repository of methodology, templates, functional decompositions and dashboards to help firms accelerate the initial analysis and implementation of the accelerated settlement transition.
