Implementing T+1 Part One: What is T+1 & Who Does It Benefit?

On February 15, 2023, the U.S. Securities and Exchange Commission (SEC) issued a press release announcing a new rule that shortens the standard settlement cycle for securities transactions from two-day settlements (known as T+2) to next-day settlements (known as T+1).

For financial businesses that deal with securities transactions, the SEC’s T+1 ruling will have a major impact on the efficiency and security of settlements. The key to making your implementation of T+1 is understanding who T+1 affects and when total compliance is expected.

The move from T+2 to T+1 marks a decided shift in the securities and investment landscapes, as the adoption of this rule reveals that digital innovation is now a necessity for compliance.

What is T+1?

T+1 is an acronym for trade date +1, a financial term that indicates when a trade will be settled. For a settlement to be T+1, it must be settled the next day after a trade occurs.

In 2017, trade settlement was changed from T+3 (three business days to settlement) to T+2 (two business days to settlement). This movement from T+3 to T+2 was widely deemed a success, with key benefits of the T+2 initiative including: lower risk, cost reductions, and quicker access to funds.

With the increasingly digitally-powered financial industry, there is a clear need for even faster settlements. The official SEC press release states:

Why is the Switch from T+2 to T+1 Advantageous for Securities Settlements?

As stated, one of the SEC’s core goals behind the T+1 ruling is to reduce risks in securities transactions.

In December 2021, the official initiative Accelerating the U.S. Securities Settlement Cycle to T+1 was by the Depository Trust & Clearing Corporation (DTCC), in collaboration with the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA), and Deloitte.

One key consideration highlighted in this original document is the need for the financial industry to embrace technology and software-based solutions to enable T+1 settlements. The document further emphasizes that the adoption of T+1 settlement will require changes to the processes of not just settlements but also trade execution, processing, financing, and payments.

The DTCC estimates that T+1 settlement will result in a 41% reduction of volatility in the NCSS margin requirement — an essential change that could potentially save billions of dollars for financial businesses.

Additional benefits of the switch from T+2 to T+1 for securities settlements include:

When Will T+1 Settlement Go Into Effect?

The current date of compliance for the T+1 settlement change is May 28, 2024.

It is estimated that implementation of T+1 would require between 16 to 24 months to complete following the adoption of an official ruling. In the official SEC final rule document, several key considerations are outlined for why May 28th, 2024 is the ideal compliance date:

What are the Global Impacts of the T+1 Ruling?

Though the T+1 ruling is a regulatory change in the U.S., it still presents a significant global impact.

For instance, in 2021, Canadian regulators began working with a U.S. financial services industry working group to begin preparing for a move to a T+1 settlement cycle. The movement to T+1 does not yet have an official compliance date but is expected to occur later in 2024.

In the official SEC final ruling document, Canada is brought up as an important consideration when choosing a compliance date. Specifically, those in favor of pushing the compliance date after Labor Day weekend in September named U.S. and Canadian market unification as one of the reasons for a September deadline, as Labor Day is the only shared three-day weekend between the two nations.

Although the SEC ultimately went with the May 2024 compliance date, the consideration of how this date may impact Canada is significant nonetheless.

Around the globe, several nations are working on adopting the T+1 settlement cycle as well.

The DTCC reports that lowered margin requirements and greater market efficiency are two driving factors behind the adoption of T+1 in the U.S. However, as the DTCC notes, these drivers can vary depending on where in the world you are.

For example, India’s T+1 settlement cycle came into effect in late January 2023 — albeit for different underlying reasons than in the U.S. According to the DTCC, the driving force behind T+1 adoption is retail investment, which has grown significantly since the onset of the pandemic in 2020.

The fact of the matter is that financial businesses and investment firms all across the world are recognizing the importance of faster settlement times. As one of the most predominant economies, the U.S. diving into a T+1 settlement cycle is sure to send ripples through the global financial industry.

Final Thoughts: How Your Business Can Implement T+1 Effectively

With the T+1 compliance date set, the time is now to define your strategy for T+1 implementation.

This implementation is likely to be a crucial turning point for the financial services industry, as it solidifies the vital role of technology in everything from operations to compliance. For your business to achieve a successful T+1 implementation, expert support from technology specialists is key.

Exadel offers a wide range of services to financial services businesses, including regulatory compliance solutions. With the help of our team’s vast expertise in all things financial services technology, we can ensure your current settlement systems are prepared for the T+1 implementation and help you make improvements as needed.

Through a partnership with Exadel, your business can benefit from our strategic locations and resources spread out across North and South America, as well as Europe and Asia.

The Exadel team has years of not just technical expertise, but also a wealth of experience in the financial industry as well. We understand the complexities of completing new implementations while maintaining a secure and fully-compliant digital infrastructure. Through our services, you can benefit from innovative technologies combined with expert support from industry specialists.

Don’t wait until it’s too late to begin your T+1 implementation. Get started with Exadel today to begin developing an implementation strategy that reduces potential downtime and optimizes efficiency.

This article is part one of two covering the ins and outs of T+1 implementation. Make sure to check out part two, where we dive into the specific challenges of T+1 implementations and how to resolve them, including the overlap of T+1 and Swift 20022 implementations!