Impact of the T1 settlement change

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.

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.

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

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.

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.

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.

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.