What is T+1 settlement? Faster trade settlement explained

The shift to T+1 settlement is one of the most significant changes in the securities and financial services industries, marking a move towards faster trade processing and improved market efficiency. This change - already operation in the US and set to be implemented from October 2027 across the EU - will have a big impact on trading timelines, liquidity, and risk management across various regions. In this guide, we’ll explain what T+1 settlement is, why it matters, and how businesses can prepare for its implementation, including the role of automation in managing this transition.

What is T+1 settlement?

T+1 settlement refers to a transaction cycle where trades are settled on the next business day after the trade date. This is a major step forward from the more common T+2 settlement cycle, where trades are settled two business days after the trade date. The shift to T+1 settlement significantly accelerates the trade lifecycle, reducing the time it takes for securities to be transferred and the corresponding payments to be made.

This change will impact major financial markets, particularly in the UK, EU, and US, where financial institutions and market participants will need to adjust their processes to meet the new timeline. The goal is to improve market liquidity, reduce counterparty risks, and create a more efficient and stable trading environment.

Example of T+1 settlement

In a typical T+1 settlement scenario, a trader buys a stock on Monday, and the trade is settled (the exchange of funds and securities) on Tuesday, rather than waiting for two days, as is currently the case with T+2.

Comparison of settlement cycles (T+1 vs. T+2 vs. T+3)

• T+3 (current standard): In the T+3 settlement cycle, trades are settled three business days after the transaction date. This cycle was the norm for many years but has now been largely replaced by T+2 and T+1 in many global markets.
  
  
• T+2: With T+2, the transaction is settled two business days after the trade date. The UK, EU, and US markets adopted T+2 in 2017, improving settlement efficiency but still leaving a delay of two days between the trade and settlement.
  
  
• T+1: T+1 settlement drastically reduces the time to one business day, offering a faster, more efficient settlement process.
  
  

Why is T+1 so important?

The shift to T+1 settlement represents a major leap towards reducing systemic risk and increasing liquidity in the financial markets. Some of the reasons why this change is so crucial include:

• Speed and efficiency: By reducing the settlement time to one day, market participants will be able to access their funds more quickly, which enhances liquidity and reduces the time capital is tied up.
  
  
• Reduced risk: A faster settlement cycle decreases the amount of time for counterparty risk to accrue. With the current T+2 system, the risk of default or other disruptions remains for a longer period, but T+1 mitigates that risk.
  
  
• Improved capital efficiency: Investors and institutions can reinvest their capital more quickly, which improves overall market efficiency.
  
  

Key lessons from the US shift to T+1 settlement

The US has already started implementing the T+1 settlement cycle, and the EU can draw valuable lessons from this transition. The US has faced challenges related to technology upgrades, risk management adjustments, and operational training. The key takeaway for the EU is the importance of automation and streamlined processes to facilitate this shift efficiently.

The benefits of T+1 settlement

The T+1 settlement cycle provides several benefits for businesses and market participants, including:

• Reduced counterparty risk: A faster settlement cycle reduces the window for potential default, as transactions are completed more quickly, lowering the exposure to counterparty risk.
  
  
• Improved liquidity and capital efficiency: With quicker access to funds, businesses can reinvest capital faster, improving liquidity and allowing them to make the most of market opportunities.
  
  
• Enhanced market stability: By reducing the time between trade and settlement, the market becomes more stable, reducing the potential for disruptions caused by delays in settlement.
  
  

The impact of T+1 settlement

T+1 settlement will drive changes across multiple areas of the trading lifecycle, particularly in reconciliation and risk management:

• Faster trade lifecycle and reconciliation: The shorter settlement period means that both the trade lifecycle and reconciliation processes will be accelerated, requiring businesses to adapt their operations for faster processing without reducing accuracy.
  
  
• Changes to middle- and back-office processes: Businesses will need to adjust their middle- and back-office operations, ensuring that processes are in place for rapid transaction matching, trade confirmation, and settlement.
  
  
• Increased need for automation: The transition to T+1 will place increased demands on automation to handle the fast-paced settlement process. Firms will need automated systems to ensure accuracy, speed, and compliance. 

How automation can assist with T+1 settlement

Investing in automation and technology is crucial to successfully managing the transition to T+1 settlement. Here’s how automation can help:

• Streamline trade confirmation processes: Automation can reduce the time it takes to confirm trades, ensuring they are processed within the required timeframe.
  
  
• Enhance reconciliation: Automated reconciliation tools can handle complex trade data, improving accuracy and reducing the time spent on manual reconciliation.
  
  
• Train staff on new settlement timelines: Automation solutions also allow for easier training of staff on the new settlement timelines, ensuring that all stakeholders are prepared for the changes.
  
  

Trade up your reconciliation

The move to T+1 settlement is a seismic shift that will improve market efficiency, reduce counterparty risk, and provide quicker access to capital. As financial markets prepare for this change, adopting automation and adjusting internal processes will be key to ensuring a smooth transition.

It's time to trade in your outdated reconciliation process in for next-gen automation. Book your Aurum demo today.