Faster Trade Settlement on Wall Street: What to Expect

Attention traders and investors! The U.S. securities market is about to undergo a seismic shift as it transitions to a shorter settlement period, moving from a two-day to a one-day settlement cycle (T+1) starting on Tuesday, May 28, 2024. This change, mandated by the U.S. Securities and Exchange Commission (SEC), aims to reduce risk and improve efficiency in the world's largest financial market, and you need to be prepared.

The shift to T+1 settlement is expected to bring a host of benefits, including reduced counterparty risk, improved liquidity, and decreased margin and collateral requirements. However, it also comes with challenges, as firms will have less time to line up funds, recall shares on loan, or fix transaction errors, potentially leading to a temporary rise in settlement failures and increased transaction costs.

Market participants, from banks and custodians to asset managers and regulators, have been working tirelessly over the weekend to ensure a smooth transition. While a small increase in the fail rate is expected initially, industry bodies and the SEC believe that settlement rates will quickly return to normal levels, as the market adjusts to the new reality.

A Global Shift Towards Faster Settlement

The move to T+1 settlement follows similar changes in India and China, and the UK is expected to follow suit in 2027. Europe is also considering adopting the faster settlement cycle. This transition is part of the ongoing efforts to make the market infrastructure more resilient and efficient, in line with the rapidly evolving trading landscape.

As we anticipate this significant shift, it's worth noting that Treasury buybacks have emerged as a lifeline for bond traders amid Fed uncertainty , highlighting the importance of adaptive strategies in navigating market changes.

While some temporary turbulence is expected, the move to T+1 settlement is a testament to the industry's commitment to continuous improvement and risk mitigation. As investors and traders, it's crucial to stay informed and adapt to these changes, ensuring that your strategies remain effective and compliant with the new settlement cycle.