Wall Street Brings Back T+1 Settlement Cycle after a Century

The US stock market is set to return to a one-business-day settlement cycle for share trades, a practice last seen a century ago. This change, which halves the time required to finalize transactions, is part of new Securities and Exchange Commission regulations and will be effective beginning Tuesday. Similar transitions to the T+1 system were also implemented in Canada and Mexico on Monday.

The move to T+1 settlement, a method abandoned in the past due to increasing transaction volumes, aims to mitigate risks in the financial system. Despite the anticipated benefits, concerns have been raised regarding potential challenges, such as international investors facing difficulties in sourcing dollars promptly, discrepancies in the speed of movement for global funds and their assets, and the decreased timeframe available for error correction.

While the industry hopes for a seamless transition, the SEC cautioned last week about the possibility of a temporary rise in settlement failures and challenges for a small segment of market participants during the adjustment period. To address issues that may arise, the Securities Industry and Financial Markets Association has established the T+1 Command Center to identify problems and coordinate responses.

Companies across various sectors have been making preparations for months, including relocating staff, adjusting shifts, and reconfiguring workflows, with many expressing confidence in their preparedness. The concern lies in whether all other counterparties and intermediaries are equally well-prepared.

Tom Price, Managing Director and Head of Technology, Operations, and Business Continuity at Sifma, noted the interdependencies within the industry and acknowledged the potential for challenges at individual firms. However, he expressed optimism in the increased staffing efforts and emphasized the importance of having personnel available during the transition period.

Although Wall Street has experienced similar transitions in the past, market professionals anticipate the current shift to be the most complex. The previous T+1 era of the 1920s, which coincided with the “roaring ’20s,” was phased out due to the manual nature of transactions being unable to keep up with the surge in trading activity.

The settlement time frame had extended to five days before being reduced to three after the Black Monday crash in 1987, and then further down to two days in 2017 to better align with modern market practices.

The move to a one-business-day settlement cycle presents unique challenges given the current market’s size, international investment complexities, and the US diverging from other jurisdictions.

Notably, currency trades typically settle over two days, requiring international investors to secure dollars more rapidly for US securities transactions. Despite the one-day settlement timeframe in theory, a significant industry deadline will leave many with only a limited window to complete this process, coinciding with a period of low liquidity.