Over the past three decades, the capital markets underwent a progressive shortening of the securities settlement cycle. From settlement five days after the trade date (T+5) before 1993, to T+3 from 1993 to 2017 and T+2, from 2017-2024. This progression has been made possible by advances in trading platform and clearing system technology that have eliminated the need for physical securities handling, allowing for more efficient electronic processing of trades.
Straight-through processing (STP) has fundamentally transformed the settlement process, removing error-prone manual touchpoints that previously caused delays. Settlement instructions now flow directly from execution systems to securities depositories, increasing operational efficiency across the entire trade lifecycle.
Risk management technology at clearing houses has advanced at an astounding pace. Currently, sophisticated algorithms can calculate and manage counterparty exposure in real time, reducing the need for an extended risk assessment period between when a trade is executed and when it ultimately settles. Along with STP, this has been instrumental in enabling the compressed settlement timeline.
In this article, written in association with Vermiculus Financial Technology, GreySpark Partners explores several critical dimensions of the T+1 transition in North America:
- The fundamental drivers behind the shift to T+1, its impact across US financial markets, and the substantial industry-wide investment that firms had to make to ensure compliance with the compressed settlement framework.
- The benefits and operational efficiencies that market participants are reaping, as well as the challenges they have had to overcome, as they navigated the transition from T+2 to T+1.
- The comparative impact of the compressed settlement period on large and small buyside firms, as well as financial market infrastructure that encompasses exchanges and marketplaces, clearing houses and central securities depositories (CSDs).
- The immediate effects and implications of North America’s adoption of T+1 settlement, highlighting issues and challenges that institutions have encountered as they adapt to the new settlement environment.
