February 27, 2024

Impact of the T1 settlement change

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  1. Overview
  2. What is T1
  3. Key benefits
  4. Local or global investors
  5. FAQ
  6. Research and Insights

Overview

In the clearing and settlement of equity trades, this year something big is happening.

Starting May 28, 2024, the US equity market settlement period shortened from two business days after the trade date (T+2) to one (T+1).
We have published this Q&A to help:

  • educate investors on the range of financial market activities that will be impacted by the shorter T+1 (T1) US equity settlement change.
  • index users become aware of the potential knock-on effects.

What is the T+1 (T1) settlement change and when is it happening?

  • The US Securities and Exchange Commission (SEC) adopted rule changes in February 2023 to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T2) to one (T1).
  • The rule change covers US equities, corporate debt and unit investment trusts and came into effect on May 28, 2024.

Insights

For specific insights on the impact of the US equity market’s impending move to a shorter settlement cycle:

Global index provider perspective
Asia-Pacific perspective
European perspective

What are the key benefits of a T1 shorter settlement cycle?

  • Greater settlement efficiency protects investors by reducing systemic risks, operational risks, liquidity needs and counterparty risks.
  • It also makes a positive contribution to a reduction in margin requirements and allows investors quicker access to the proceeds from a sale trade.

Does the T1 settlement rule change have local or global investors in mind?

  • The arguments in support of a shortened settlement cycle for equity markets focus primarily on the benefits to the relevant local market.
  • It is typically local regulators, in combination with other key local market authorities, that are driving the change in each country/region.
The arguments in support of a shortened settlement cycle for equity markets focus primarily on the benefits to the relevant local market.

New time pressure under T1

Activity Time available under T+2
settlement regime
(from US market close
on trade date)		 Time available under T+1
settlement regime
(from US market close
on trade date)
Trade allocation Up to 14.5 hours 3 hours
Trade affirmation 14.5 hours 5 hours
Securities loan recall 18.5 18.5 hours 3 hours
FX conversion Up to 24 hours 3 hours/Pre-fund
ETF creation/redemption Up to 24 hours 3 hours
Ex/record dates for corporate actions Up to 24 hours 3 hours

Source: FTSE Russell, January 2024

The impact of the US equity market’s move to a shorter settlement cycle is likely to be felt most acutely in the Asia-Pacific region.

Frequently asked questions

    • The New York Stock Exchange used T+1 settlement in the 1920s, and the American Stock Exchange used T+2 prior to 1953.
    • The first real attempt to shorten equity market settlement cycles came in recognition of the market risks emanating from the 1987 stock market crash. The US move to reduce the equity settlement cycle from T+5 to T+3 change occurred in 1995.
    • Many European markets also moved to T+3 in the early 1990s, with the UK shortening its cycle from T+5 to T+3 in 2001. Fast forward to the last 10 years and the previous “gold standard” of a T+3 settlement cycle has shortened to T+2 in many, though not all equity markets.
    • The likely first movers to T+1 are equity markets where liquidity provision is dominated by the transactions of local participants: notably the US, India, and China.
    • As of June 2022, foreign investors are estimated to own about 19.6% of the US securities market. In India, the proportion of foreign ownership is also estimated to be close to 20%, whereas in China the international holding in ‘A’ shares is around 4%.
    • Mexico and Canada are interesting exceptions, in that these markets are not so dominated by local traders but are still scheduled to mirror the US shift to T+1 settlement.

Research and Insights

Research

A stronger US dollar – will EMs feel the pinch?

Structural changes in emerging markets over the last 20 years mean that they may be more resilient to the potential impacts of recent US dollar strengthening.

Research

Higher correlation of multi-asset returns

In this paper we identify key drivers of correlations in returns, using FTSE Russell multi-asset index data since 2000.

Research

Composition changes of the Russell Indexes over 40 years

The 40th anniversary of the Russell indices gives us the opportunity to review how the indices have changed over this period. In this paper we find that the indices closely mirror changes in the underlying US economy, indicating that they are representative of the broader economy.