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Capital markets across the globe are gearing up for a seismic change in the post-trade settlement period, as the United States transitions to a shortened ‘T+1’ securities trading settlement period. The new settlement period will become effective on 28 May 2024. ‘T+1’ trade settlement means that securities trading settlements must be completed within one day of the transaction date. All financial firms who participate in or facilitate the trading of US-listed securities, irrespective of global location, must comply with this accelerated trade settlement rule when it goes live. This poses significant financial and structural challenges for in-scope financial firms. In this article GreySpark Partners describes what firms need to consider as this deadline draws closer.

The switch to T+1 trade settlement in the US is the culmination of progressive post-trade structural transformations that have been in play since the last decade of the twentieth century, and which were necessitated by the increasingly dynamic and technologically advanced capital markets landscape. Before the era of electronic trading, when physical stock certificates were delivered by mail, the Securities and Exchange Commission (SEC) allowed five business days for securities transactions to settle. Five days became three in 1993 as electronic trading started to gain traction which facilitated greater trading efficiencies and opportunities for quicker settlement. In 2017, the SEC further shortened the US trade settlement period to two days (T+2), which has remained in force since.

The new rule stipulates that all broker-dealer transactions of US securities that settle through the Depository Trust Company (DTC) globally must be settled between counterparties within one day of the transaction taking place. These counterparties could include domestic and international financial firms, such as investment managers, custodians and broker-dealers. The US securities in scope for the new trade settlement period include equities, corporate bonds, ADRs, unit investment trusts, mutual funds, exchange-traded funds, equity options and private-label mortgage-backed securities.

While the move to T+1 trade settlement in the US has been a long time coming, its implementation has been spurred by two watershed moments – the increased market volatility at the outbreak of the Covid pandemic in 2020, and the surging interest in meme stocks such as GameStop, which infamously saw a community of retail traders squeeze hedge funds out of their GameStop short positions in 2021, undermining market confidence. Collectively, both incidents exposed investors to counterparty risks that US policy makers believed could be reduced by shortening the securities trading settlement period.

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