The U.S. Securities and Exchange Commission (SEC) has officially announced a significant change in the settlement cycle for securities transactions. Beginning May 28, 2024, the settlement period will be reduced from the current two business days (T+2) to just one (T+1). This adjustment, affecting equities and corporate bonds, aims to minimize counterparty risk while enhancing capital and margin efficiencies.
This move to T+1 places the U.S. ahead in terms of settlement speed, as many global markets continue to operate on a T+2 basis. Market participants and regulators anticipate this change will decrease credit, liquidity, and market risks by reducing the capital brokers need to reserve for transaction settlements, especially during volatile periods.
The shift towards a faster settlement cycle is not new. The U.S. made its first major step in this direction in 2017 by moving from a three-business-day cycle to T+2, shortly after the euro zone. The recent push for T+1 was partly influenced by the trading frenzy around "meme stocks" like GameStop in 2021. Now, with the T+1 rule set for 2024, the U.S. aims to further streamline trading processes. Canada and Mexico are also transitioning to T+1, starting May 27, right before the U.S.
Meanwhile, the European Union is exploring a similar transition to T+1, though a specific timeline has not been established. The European Securities and Markets Authority is currently engaging with market participants to understand the potential impacts, with a final report expected later this year. The move is considered more complex in the EU due to the fragmented nature of its stock trading market.
In contrast, some regions are already ahead in settlement times. The UK is contemplating a move to next day settlement between 2025 and 2026, with a task force reviewing the pros and cons. India has recently achieved a one-day settlement cycle and is now eyeing same-day settlements, joining China, where stock and cash settlements occur on T+0 and T+1, respectively. Other Asian markets are still on T+2, closely observing the outcomes in regions that have advanced their settlement cycles.
