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Transition to T+1 settlement cycles in global securities markets – Swift

Global securities markets especially in North America are at a pivotal point as they transition towards shorter settlement cycles of T+1 (one-day settlement post-execution) in marking a significant change in global finance.

In a world where immediacy is not just desired but expected the traditional T+2 settlement cycle (two days post-execution) is making way for this more rapid process.

But what are the implications of this shift, and how prepared is the industry? This article provides an overview of the shift towards T+1 settlement cycles in global securities markets, the challenges and impacts of this transition, and the necessary steps for successful adaptation.

The Global Ripple Effect

This transition isn’t isolated. As per Swift, changes in settlement cycles in one region have historically influenced others.

As an example, after the global shift from T+3 to T+2, we are now seeing countries like China operating a T+0 system, while others like Singapore, Japan, Australia, and India making or considering similar moves.

The United States, Canada, and Mexico have planned their transition to T+1 by May 2024, with Europe also contemplating the change.

You can get more insights on the T+1 transition and preparations from the video “The race to T+1: Your guide to getting ready” featuring experts from ISITC, The Investment Association, and Swift.

Swift network data reveals that, as of the first half of 2023, only about 10% of securities settlement messages were for T+1 settlements in equity markets. This figure is projected to rise to 30% with North America’s transition.

The Challenges Ahead

While the move to T+1 promises reduced counterparty risk and faster processing, it’s not without its pitfalls. The Swift Institute’s report points out the operational challenges, especially in cross-border settlements.

Banks and brokers will have less time to handle these processes, and the risk of increased late settlements looms large.

Currently, in the T+2 framework, about 5% of transactions fail to settle on the expected date, costing the industry substantially. The T+1 transition could exacerbate this issue.

Impact on Global Markets

North America’s market structure heavily influences global markets. Around 23% of all cross-border equity transactions on the Swift network involve North American settlements.

This transition will significantly impact market participants in the Asia-Pacific region, where about 50% of equity instructions are for North American listed equities. Time zone differences and operational challenges will be key issues.

In Europe, the complexity of multiple currencies, depositories, and jurisdictions, coupled with the Central Securities Depositories Regulation (CSDR) penalties, elevate the risk of settlement failure.

Swift’s Road to Enhanced Efficiency

To navigate these challenges, automation in the securities industry is crucial. Without it, manual processing and human errors could increase late or failed settlements. Moreover, enhancing end-to-end transaction transparency is vital.

A solution is in the works, with the Swift community working towards adopting a shared Unique Transaction Identifier and providing automated tracking for transaction participants.

Collaborative Efforts for a Smooth Transition

The industry must work cohesively to tackle the challenges of shortened settlement cycles. Through increased efficiency, transparency, and automation, the transition can be successful. As the industry braces for this change, understanding its complexities and preparing for them is crucial for all market participants.

Reference : Swift

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