T+1 lessons learnt across various jurisdictions

In February 2023, the US SEC finalised rule changes to reduce the settlement timeline for most securities transactions, from T+2 to T+1 by 28 May 2024.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members

The compressed settlement cycle promotes better capital utilisation, reduces risk exposures and settlement risk, and limits systemic risk. Given significant benefits, several other jurisdictions are transitioning to T+1 including Canada which is moving in tandem with the US  on 27 May 2024. India leapfrogged the US and Canada by transitioning to T+1 for its equity markets in January 2023, using a phased approach, which has been widely supported by market participants.

In December 2022, HM Treasury set up an Accelerated Settlement Taskforce to consider the costs, benefits and challenges of a potential move to T+1 settlement in the UK markets.

KPMG is assisting financial services clients globally with their T+1 transformation programmes, providing guidance and market insights as the momentum continues to grow. Through this work, a number of lessons learnt have emerged which could inform the UK’s implementation approach to T+1.  

In the US and Canada, market participants submitted comments to the SEC suggesting implementation timelines were aggressive, lacked clarity, and were potentially not achievable, as many firms faced challenges in allocating budgets to T+1 versus other competing regulatory priorities. As a result, impact assessments were completed late or not to the level of depth required to inform granular implementation planning. 

Lesson learnt 1: regulatory authorities should give as much notice as possible on the implementation timelines. Firms should also not delay the completion of impact assessments to understand their unique challenges and assess quantum of change to enable sufficient time to respond strategically. Engaging all parties early in the dialogue should allow for broader knowledge sharing on key challenges.

UK firms that interact with markets that have transitioned (or are transitioning) to T+1 are already having to plan how to operate T+1 and T+2 settlements concurrently. This will probably continue even after the UK transitions to T+1, as the EU is unlikely to follow the same timeframe. The SEC acknowledged that there will be impacts of cross-border misalignment (e.g. how to fund a T+1 trade with an FX transaction that settles in T+2) but it has not made any exceptions for dependencies such as FX conversion timing, non-US bank cut-off times etc.

Lesson learnt 2: as UK markets are considerably more international, the UK should consider ways to reduce the impact of cross-border misalignment, e.g. by changing key cut-off times.

As the implementation of T+1 embeds in India, trade bodies have highlighted that misalignment of cut-off times, e.g. custodian trade cut-off time with the opening time of FX trading, have caused issues with liquidity or resulted in higher margin payments.

Lesson learnt 3: The UK should consider the interaction of post-trade processes end-to-end as it compresses settlement time.

As the operational impacts become clearer in the US and Canada, firms have realised they cannot just “throw bodies” at the problem.

Lesson learnt 4: There is a need to fundamentally re-organise processes to automate and streamline post-trade (e.g. exceptions management, reconciliations) but also consider the impact on the front-office and across divisions and geographies ensuring holistic and consistent approach. UK firms should not underestimate the scale of change required and align their focus on data quality.

Further lessons learnt are likely to emerge from the US and Canada as they move towards their deadline. As the UK authorities and firms start to consider the UK moves to T+1, peculiarities of the UK market may emerge.  It is important for the UK to learn from experiences across other jurisdictions to ensure a smooth and efficient transition.

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