Transitioning to T+1 Settlement: Challenges and Mitigation Strategies

The financial industry, specifically the US and Canadian markets, is on the cusp of a significant transition – moving from a T+2 to a T+1 settlement cycle. The implications of this change not only affect US and Canadian trading entities, they also create significant burdens for foreign entities investing in North American markets. Foreign investors will face not only the accelerated time pressures on securities settlement, but also accelerated foreign exchange time constraints that will add trade costs.

At first look, the move to T+1 appears to be a repeat of T+3 to T+2. But the technical and operational issues for both the buy-side and the sell-side are shaping up to be much more challenging than initially thought.

As with any transformation of this magnitude, however, it poses a host of operational challenges – with potential benefits – that must be surmounted before the current May 2024 go-live date. (It will also be interesting to see if, as we approach May 2024, the Labor Day 2024 buffer ill be employed.)

The benefits of T+1 settlement
The T+1 settlement cycle promises the following advantages:

• Reduced counterparty risk – same-day affirmation (SDA). With a shortened settlement cycle, the window for a counterparty to default on its obligations contracts. After potential turmoil following the go-live date, this will result in fewer settlement failures. This will then mitigate counterparty, market and liquidity risks by reducing outstanding settlements and the associated risks around replacement costs.

• Increased efficiency. The acceleration in trade processing and streamlined trade corrections reduces the time lag between trade execution and final settlement. This fosters greater operational efficiency and lowers the costs associated with trade processing….

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Jay Wolstenholme, Research Director at Chartis Research spoke with Sam Farrell, Head of North America at Torstone Technology to discuss the complexities of moving to T+1 from T+2 in the US and Canada.

In the conversation, Jay and Sam discuss technology challenges and technical readiness, future considerations, and the differences between the Canadian and U.S. Markets. Watch the video below.