The Move to T+1 Settlement and Beyond

Q&A with BetaNXT

The financial industry is preparing to transition to a T+1 settlement cycle in the United States on Tuesday, May 28, 2024, and in Canada on Monday, May 27, 2024. Market participants are working on all necessary changes in order to be ready for a successful transition. We sat down with Will Leahey, Head of Regulatory Compliance at BetaNXT, to talk through the coming changes to the settlement cycle as well as some future considerations.

The Move to T+1 Settlement

Q: In your recently released whitepaper “T+1 – Why This Time Feels Different from T+2” you outline the different but related causes of the 2017 move to a shorter settlement cycle and the upcoming move to T+1. For someone who isn’t going to read the whitepaper, how would you summarize the difference?

The difference is essentially push vs. pull. In the lead up to the 2017 move to T+2, the industry pushed for regulators to provide certainty through adopted rules and guidance. For the upcoming move to T+1, the SEC reaction to the meme stock phenomenon and the events of early 2021 has led the SEC to pull the industry to a shorter settlement cycle on a timeline a bit shorter than the industry would prefer given the complexity of the move.

Q: Since the aggressive compliance date for the move to T+1 is fast approaching, what do firms need to keep in mind?

In short, firms must manage closely the defect management cycles between now and the compliance go-live date of T+1. The changes needed for T+1 settlement have a higher degree of difficulty compared to what was done to get to T+2, and there is not much time to ameliorate challenges that reveal themselves in the narrow testing window.

T+1 requires exhaustive testing of compression between batch cycles within firms, between firms, and at central processing nodes (e.g., DTC, NSCC, Institutional Trade Processing, and securities lending platforms). This compression creates competition for processing time and manual interventions in between the cycles. The process collisions that may result within firms, between firms, and with the central processing nodes can create idiosyncratic impacts that are difficult to trace to the root cause. Consequently, the issues that reveal themselves in testing may be more complex than those that presented themselves in the 2016-2017 lead-up to the change to T+2, and there are precious few development, internal testing, and industry testing cycles between now and Memorial Day 2024.

Q: How will regulatory trends affect trading and settlement into 2024?

As it relates to trading, regulations are likely to materially shape equity market structure in the medium term. Specifically, the way firms support individual investor interaction with the market will evolve in response to the raft of proposed SEC and FINRA equity market structure rules that arose from the meme stock phenomena. Also, separate from the meme stock response, the SEC has a broad and aggressive rulemaking and enforcement agenda.

Regulation is largely reactive. Regulators’ response to the technology advancement of the recent past, particularly as it relates to where broker-dealers and advisers interact with the individual investor (e.g., smartphone-based trading applications), appears animated by the belief that a more stringent rule and guidance framework is necessary.

As it relates to the functions that support settlement, there is an essential push to real-time processing, which is well underway at BetaNXT and throughout the industry, though much will take place following the move to T+1. With the current aggressive timeline for T+1, the lowest-risk path to meeting the requirements is to compress existing—heavily batch—processes. Following the move to T+1, firms will seek to remove risk and enhance efficiencies through replacing internal batch processes with real-time processes and automation that reduces the operational friction in settlement. Focus areas will likely include input data quality to reduce exceptions, high adoption of pre-trade standing settlement instructions, faster institutional trade allocation instructions, and intraday fail management, among others.

Q: What longer-term impact do you foresee these developments having on clearance and settlement processes?

As it relates to future shortening of the settlement cycle, there is a practical internal limit to the regular-way settlement cycle, even with real-time processes throughout the industry. The risk reduction and capital efficiency of multilateral netting require the central counterparty to perform at least one batch cycle that involves a significant percentage of market participant purchase and sale settlement obligations in a specific security. Settlement obligations that are not included in multilateral netting, such as real-time settlement between a buyer and a seller away from the central counterparty, increase the capital intensity of settlement because the seller needs to have more money on hand at any given moment to meet real-time settlement obligations.

Said another way, real-time processing is a net benefit to the industry in nearly all places but one—multilateral netting of settlement obligations. Significant investment in operational processes over the better part of a decade could shorten the settlement cycle to the night of T. But right now, anything approaching real-time settlement in the near term would jeopardize the important risk reduction and capital efficiency within today’s settlement infrastructure.


Will Leahey is Head of Regulatory Compliance at BetaNXT.