After a 100 year absence, T+1 makes a return

10/01/2025

Contrary to what many would imagine, a century ago, the US abandoned T+1, as soaring trading volumes around the time of the Wall Street 1929 crash made it increasingly difficult for people to manually process transactions in just a single day.

Over subsequent decades, the settlement cycle lengthened and from 1968, T+5 became the norm for many securities markets, at least until Black Monday struck in 1987 when the US and other global regulators – alarmed by the volatility unleashed by the crash – sought to standardise and reduce the five-day settlement risk window that faced financial institutions by adopting a T+3 settlement cycle.

Efforts to further mitigate settlement risk continued and in 2017, the US moved from T+3 to T+2 for equities. In parallel, the US has already been settling government bonds in T+1 for some years.

Sparked by the meme stock trading turmoil in 2021, US regulators announced in 2022 that they would re-introduce T+1 after a 100-year hiatus.

The logic was that a one-day settlement window would help the industry achieve better operational efficiency, reduce counterparty risk and lower costs through eased margining requirements.

Following almost 12 months of intense war gaming and stress testing, T+1 finally went live in North America in May 2024 and the UK, the EU and Switzerland plan to follow in the 4^th quarter of 2027.

A settled start for T+1 in North America

So far, things are looking good. According to Depository Trust and Clearing Corporation (DTCC) information, trade fails have remained consistent despite the sharp reduction in post-trade processing time. Data from the DTCC also showed that affirmation rates actually got better in the days after T+1 went live, with well over 90% (www.globalcustodian.com) of all trades being successfully affirmed in that period – up from 73% in January. (www.dtcc.com)

The other big fear – namely that CLS’s cut-off times would result in more FX trades settling bilaterally, thereby increasing the risk of fails – does not appear to have materialised either. (www.globalcustodian.com)

And there were some important lessons for Europe

Although T+1 in the US has not caused too many market fissures, the transition was not without its challenges.

Most notably, in the run-up to T+1, many non-US financial institutions were still unsure whether the rule changes applied to them, especially when settling internationally.

“The most frequent question from our clients during the US T+1 migration was ‘are we captured by the rules if we settle outside the US?’ Securities Industry and Financial Markets Association (SIFMA) guidance a few weeks before migration was invaluable in providing clarity for market participants. Getting the scope of rule changes clarified early and how they apply to international market participants, are important lessons for Europe and one the UK Task Force has taken to heart,” explained Gareth Jones, Director, Product Management at Euroclear.

Although T+1 in the US has not caused too many market fissures, the transition was not without its challenges.

And now, for the UK and EU

Other major markets, including the EU and UK, have now committed to go ahead with T+1.

In the UK, a government-appointed Settlement Taskforce on Accelerated Settlement has recommended that T+1 be introduced by no later than the end of 2027 (HM Treasury – 28 March, 2024 – Accelerated Settlement Taskforce: Government response).

Meanwhile, in the EU, the European Securities and Markets Authority (ESMA) has recommended 11 October 2027 as the date when the EU should migrate to T+1 following extensive work with the industry.

T+1 in the EU – a new challenge beckons

Market participants (i.e. regulators, FMIs, etc) are all too aware that introducing a shorter settlement cycle across the 27 EU member states will be a more complex challenge, especially given the number of markets; and the fact that the migration includes sovereign bonds and securities financing markets (unlike the US and UK).

"It is massively important that settlement cycles are harmonised across developed markets, so that liquidity costs incurred in switching assets between T+2 and T+1 markets are eliminated. "

Gareth Jones, Director - Product Management, Euroclear

Qualifying the cost benefits

The cost-benefit analysis of T+1 is always a challenging topic.

Although T+1 could lead to margin savings (i.e. the DTCC calculates around a 40% reduction in the volatility component of the National Securities Clearing Corporation’s [NSCC] margin), it may lead to costs elsewhere. Even though 40% may sound like a significant portion, margins for cash equities represent only a tiny fraction of the total initial margins required by CCPs.

If T+1 leads to more trade fails in the EU, firms could find themselves on the receiving end of Central Securities Depositories Regulation (CSDR) settlement discipline regime cash penalties. “It is that vital settlement efficiency does not fall as a result of the operational challenge of T+1,” continued Jones.

Against this, the most important benefit of T+1 is indisputable. According to Jones, “it is massively important that settlement cycles are harmonised across developed markets, so that liquidity costs incurred in switching assets between T+2 and T+1 markets are eliminated. Otherwise, these costs will ultimately result in reduced performance for end investors. We should also not forget that T+1 reduces counterparty risk and is an important catalyst to improve operational efficiency and automation.”

Making T+1 a success in the EU

Implementing T+1 in Europe will face more obstacles than in North America, but it can and will be done.

“The establishment of the EU Industry Task Force under the leadership of Giovanni Sabatini is a very positive step and an effective collaboration and engagement model between market participants and authorities will also help ensure that T+1 is a success in the EU,” added Jones.

more related news & insights

Speaking recently, Gareth Jones, Director, Product Management at Euroclear, looked at the background to the T+1 transition in North America and what a shorter settlement cycle could mean for the EU.