The US Securities and Exchange Commission (SEC) has confirmed that the US market will move to a one-day settlement cycle (T+1) by May 2024. However, do not expect the Europeans to follow suit anytime soon.
The revised settlement compression time of T+1 for the US market was officially proposed by the SEC in February 2022. It ensures securities trades are cleared and settled within one working day.
Trade groups have broadly welcomed the commission’s proposal to cut the so-called settlement cycle to a single business day from two, six years after an earlier SEC rule shortened the period from three days.
However, some have complained the commission isn’t leaving enough time for them to adjust before the rule takes effect in May 2024.
The longer a trade remains unsettled, the more likely a buyer or seller may default — by refusing to pay or to hand over shares sold.
In response, Pete Tomlinson, director of post trade at the Association for Financial Markets in Europe (AFME), says, “The May 2024 goal for moving to one-day settlement in the US is ambitious and will be a significant challenge for all market participants globally.
However, adopting T+1 settlement in Europe will be significantly more challenging, given the fragmented nature of European markets and the greater operational, structural and regulatory complexity.
He adds, “Further analysis is required across the industry to quantify the costs and benefits, and the changes required to the current operating environment to facilitate such a move. AFME will work closely with all stakeholders to ensure a collaborative industry approach to this topic.”
In a paper published last year looking at the pros and cons, AFME said one of the challenges is that post trade activities would be compressed into shorter time frame.
As a result, there would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes to take place.
While it might be assumed that moving from two days to one day would reduce the available post-trade processing time by 50%, AFME actually estimates market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction.
©Markets Media Europe 2023
