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Embracing The Shift To T+1 Settlement Reducing Risk And Enhancing Efficiency In Financial Markets 900X330

Embracing the Shift to T+1 Settlement: Reducing Risk and Enhancing Efficiency in Financial Markets

Monday, May 15, 2023

Explore the shift to T+1 settlement in financial markets, its impact on reducing counterparty risk, and how to prepare for the transition.

The Move to Trade Date Plus One (T+1) Settlement

One important change that is taking place in the financial markets is the move to Trade Date Plus One, or T+1 settlement. Currently, trades in many financial markets, including stocks, bonds, and options, settle on T+2, meaning that the transaction is completed with all securities and cash being delivered two business days after the trade date. However, effective May 28th, 2024, the U.S. securities industry will move to a shorter settlement cycle of one business day, or T+1.

SEC's Proposal and Approval

The change was proposed by the U.S. Securities and Exchange Commission (SEC) and was approved by the industry in 2017. The SEC believes that a shorter settlement cycle will reduce counterparty risk and increase operational efficiency in the financial markets.

Counterparty Risk Reduction

Counterparty risk refers to the risk that one party in a financial transaction will default on their obligations. With a shorter settlement cycle, the risk of default is reduced, as trades will settle faster and counterparties will be required to have sufficient funds or securities on hand to complete the transaction or risk facing penalties or other consequences.

Preparing for T+1 Settlement: Necessary Changes and Adjustments

This will require changes to the trade workflow for investors and traders. Systems and processes need to be modified, trading strategies need to be adjusted, and coordination with custodians and counterparties is required to ensure a smooth transition.

The Potential for Same Day Settlement

While there is discussion to further reduce the settlement cycle to same day settlement, it would need to be carefully considered and planned, and would likely be a longer-term goal for the industry.

EQ's Commitment and Client Preparation

At EQ, we are committed to helping our clients navigate these changes and stay ahead of the curve in the fast-paced world of finance, while ensuring a seamless transition for shareholders. As such, we are currently enhancing our underlying systems and are aligning with industry testing scheduled to commence in Q4 of this year in preparation for next year’s implementation.

Recommendations for Clients

We recommend that our clients start preparing for the move to T+1 by reviewing their trade processes and procedures, stay informed about any updates and changes related to the move to T+1 settlement, and seek advice from a qualified financial advisor if needed.

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