The World is Moving to T+1: Are You Ready?

The landscape of securities settlement is undergoing a significant transformation globally, with a growing number of markets shortening their settlement cycles to T+1 (Trade date plus one day). Currently, around 40% of global turnover in listed securities now settles on a T+1 basis. This shift signifies a major move towards increased efficiency and reduced risk in post-trade processing.

The journey to T+1 has already seen notable successes. In September 2017, the US market took a significant step by shortening its settlement cycle, ultimately leading to the final transition to T+1 in May 2024 for exchanges in the US, Canada, Mexico, and Peru. This major change occurred with minimal disruption for both domestic and international market participants.

The smooth transitions in these markets were not accidental. Several key factors played a crucial role, including active engagement by the industry through representative bodies, decisive regulatory action, and thorough preparation by individual firms. The industry collaboratively addressed practical challenges and shared best practices, fostering confidence among regulators. This certainty from regulators then spurred essential investments in technology and infrastructure. 

Notably, firms that invested in automation to handle trade confirmation, allocation, and affirmation on trade date not only managed increased staffing costs but also achieved lower fail rates compared to the previous T+2 regime. 

The benefits extended beyond operational efficiency, unlocking capital savings related to reduced counterparty exposure and lower clearing fund requirements, while also delivering better quality settlements. Consequently, a significant majority of firms reported that the transition met or exceeded their expectations.

Looking ahead, the momentum towards T+1 is likely to continue. With nearly half of all respondents feeling prepared, the UK, the EU, and Switzerland are anticipated to be the next wave of markets considering the transition in 2027-2028. Major jurisdictions in Asia Pacific have also commenced early consultations, with potential transitions estimated around 2029 and 2030.

What about Australia? 

As a crucial market in the global securities industry, Australia will almost certainly follow suit and can learn from the experiences of other markets. While Australia already boasts a highly efficient settlement system with low fail rates, the pressure to align with global markets is growing. However, Australia's path to T+1 will likely be sequenced after the completion of the ASX’s CHESS replacement, targeted for 2029. The industry has clearly communicated its priority on this infrastructure upgrade. For Australian participants, the move to T+1 is viewed as the final stage in modernizing post-trade processing.

Despite the overall positive outlook, Australian participants face specific challenges, particularly in treasury management. The need to deliver foreign currency on T+1 has led to widened forex spreads and increased pre-funding costs. Addressing this funding gap could be a significant incentive for Australia to shorten its settlement cycle. The transition in other markets will also likely encourage this move, particularly for large Australian institutional investors with global equity portfolios.

The global move to T+1 is undeniable.

Whether you are a market participant in a jurisdiction already operating under T+1, one preparing for the transition, or observing from a market yet to make the leap, understanding these changes is crucial. Now is the time to assess your operational readiness, engage with industry discussions, and explore potential investments in automation to ensure a smooth transition when it comes to your market. The lessons learned from the successful implementations in North and South America provide valuable insights for the journey ahead. Don't wait until the last minute – proactive preparation is key to navigating this evolving landscape and realizing the benefits of a shorter settlement cycle.

Here are three social media snippets about the T+1 transition:

1. Global adoption of T+1 settlement is expanding, with around 40% of global turnover in listed securities now settled on a T+1 basis. Successful transitions in the US, Canada, Mexico, and Peru highlight the benefits of shorter settlement cycles. Learn more about the evolving securities landscape [Visit SIAA's website].
2. Shortening the settlement cycle to T+1 has led to reduced counterparty exposure, lower fail rates, and improved settlement quality in markets like the US. Proactive preparation and industry engagement are key to successful implementation. Discover best practices [Visit SIAA's website].
3. Following successful T+1 transitions in North and South America, the UK, EU, and Asia Pacific regions are now considering or in consultation phases for adopting T+1. Stay informed about these crucial market developments [Visit SIAA's website].

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Frequently Asked Questions on the Transition to T+1 Settlement

1. What is T+1 settlement, and what is the current global landscape regarding its adoption? 

T+1 (Transaction plus one day) settlement refers to the practice of completing the settlement of securities trades one business day after the trade execution date. Currently, approximately 40% of global turnover in listed securities is settled on a T+1 basis. Major markets like the United States, Canada, Mexico, and Peru successfully transitioned to T+1 in May 2024. Other significant markets, including the UK, the EU, and Switzerland, are considering or planning to implement T+1 around 2027-2028, while jurisdictions in Asia Pacific are in earlier consultation stages, potentially transitioning around 2029-2030.

2. What were the key factors that contributed to the successful T+1 transition in markets like the US? 

The successful transitions in markets like the US were primarily attributed to three main factors: active engagement and collaboration within the industry through representative bodies, decisive action from regulators in setting clear target dates and consistently communicating their commitment, and thorough preparation by individual firms. This preparation often involved investments in automation to handle increased volumes and tighter timelines for processes like trade confirmation, allocation, and affirmation.

3. What benefits have been observed in markets that have already moved to T+1 settlement? 

Markets that have transitioned to T+1 have experienced several benefits, including a reduction in counterparty exposure due to the shorter settlement window, which in turn lowers clearing fund requirements. Furthermore, the investments in automation and focus on timely post-trade processing have led to better quality settlements and lower fail rates compared to the previous T+2 regime. Some firms also reported that the transition went as expected or even better than anticipated.

4. What unique challenges does the potential transition to T+1 pose for Australian market participants? 

A significant challenge for Australian participants stems from treasury management, particularly concerning foreign currency transactions. The need to deliver foreign currency on T+1 while proceeds from assets may still be settling on T+2 has widened forex spreads, increased pre-funding costs, and heightened the demand for overnight funding, potentially by up to 50%. This funding gap between purchase settlements and sale proceeds poses a considerable hurdle.

5. Why might Australia eventually consider adopting a T+1 settlement cycle?

 Despite the challenges, there are compelling reasons for Australia to consider moving to T+1. Aligning with global market standards and the practices of major international partners is a key driver. Additionally, shortening the settlement cycle could help close the funding gap experienced by investors with global portfolios, such as Australian super funds, and potentially reduce counterparty risk and clearing fund contributions over time.

6. What is the current priority for the Australian Securities Exchange (ASX) regarding its post-trade infrastructure? 

The immediate priority for the ASX and the Australian financial services industry is the replacement of its core clearing and settlement system, CHESS. This is a major project targeted for completion around 2029. The industry has clearly communicated to the ASX and ASIC that the CHESS replacement takes precedence over a move to T+1 settlement at this time.