Wall Street’s historic move to the T+1 settlement aims for efficiency, but challenges persist. There may be difficulty in finding sources for foreign investors, global funds can go at different speeds and market participants have a shorter time to correct errors. During this transition, industry coordination is of paramount importance.
The US stock market has recently undergone a historic transformation, bringing it back to the speed of a century ago. Share trades in New York now settle in a single day, a change that occurred under new Securities and Exchange Commission (SEC) rules. Here are the key details:
The transition to T+1 settlement represents a significant milestone. Let’s explore what this means:
The last timeshare trades settled in a single day was during the 1920s, a decade known for its remarkable stock market performance. Back then, the manual nature of transactions made it impossible to keep up with surging trading activity, leading to settlement times as long as five days.
The T+1 settlement (where trades settled within one day) was abandoned due to volume-related challenges. However, the finance industry has reintroduced it to enhance efficiency and reduce risk.
The goal of T+1 settlement is to minimize the time between trade execution and settlement, thereby reducing counterparty risk.
International investors may need help to source dollars in a shorter settlement window. Difficulties could arise due to currency exchange and timely availability of funding.
Funds can move at different speeds relative to their assets. This discrepancy may result in operational difficulties and mismatches.
Timely identification and resolution of mistakes become critical; however, with shorter settlement periods, market participants will have less time to correct errors.
Despite individual companies' preparation, the sector's dependency remains a concern. Coordinated efforts are necessary to ensure an orderly transition.
The SEC acknowledges that the transition may lead to a “short-term uptick in settlement fails and challenges to a small segment of market participants.” To address this, the Securities Industry and Financial Markets Association (SIFMA), the finance world's leading industry group, has established the T+1 Command Center.
Firms across the spectrum have been preparing for months, relocating staff, adjusting shifts, and overhauling workflows, but concerns remain about dependencies within the industry.
While Wall Street has experienced similar transitions, this shift to the T+1 settlement is particularly challenging. Today’s market is much larger and more complex, with cross-border investments adding to the intricacy.
Settlement times were reduced to three days in the 1990s after the 1987 Black Monday crash, and in 2017, they were further reduced to two days. The move to a single-day settlement reflects the modern market’s size, scale, and global interconnectedness.
In summary, Wall Street’s return to the T+1 settlement represents progress toward a more efficient financial system. Close monitoring and coordination will be essential as the industry adapts to ensure a smooth transition. The hope is that everything runs seamlessly, unlike the 1920s, this time benefiting investors and market participants alike.
