By Maddy Everson, Compliance Extern Fall 2023


As technology has improved over the last several decades, the trade settlement period has shortened. In the 1970s and 1980s with the advent of fax machines and the founding of the Depository Trust & Clearing Corporation (“DTCC”) in 1973, settlement periods began to shrink from five to three business days. T+3 settlement had been the standard for most securities trades since 1993. However, by 2017, major financial markets had adopted T+2. At that time, the U.S. markets were the only major financial market still using the T+3 settlement period. The amended rule was designed to “enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.”1 

Shortening to T+1 

Why shorten the settlement period again? 

The shortening of the settlement cycles from T+5 to T+3 in 1993, and from T+3 to T+2 in 2017, was to promote investor protection, risk reduction, and increased operational efficiency. On February 15, 2023, the SEC voted to adopt rule changes to shorten the settlement cycle for broker-dealer transactions in securities from T+2 to T+1. The Securities and Exchange Commission (“SEC”) believes that this change can “promote investor protection, reduce risk, and increase operational and capital efficiency.”2 The Commission also noted in the adopting release that going to a T+1 settlement period is a first step toward the goal of a T+0 settlement period like government treasuries have done. 

The rule change came about partially because in January 2021, the market experienced volatility and high trading volumes in connection with the trading of “meme” stocks, the most well-known of which was GameStop. This caused clearing agencies to issue margin calls and additional capital charges on broker-dealers to manage the risk that was associated with the unusual trading activity.3 Some retail brokers reacted by restricting buying activity in certain stocks. Faster settlement was called for under the theory that it would reduce risk because when there are major changes in a stock’s price before settlement, it requires brokers to hold more funds against the risk.4 In other words, to have a shorter settlement period would allow brokers to be required to hold less funds to cover the risk of major price changes. 

While the net benefits of a shorter settlement cycle are clear, there could potentially be an increase in some operational risks. Commissioner Mark T. Uyeda noted some of these potential risks: there will be less time to address errors within the process and less time for regulators to identify and freeze the potential proceeds from potential frauds before those proceeds exit the Commission’s jurisdiction.5 Commissioner Uyeda did point out, however, that these considerations do not ultimately weigh against shortening the settlement cycle to T+1 but were enough of a reason to ensure readiness among market participants. 

How to transition to a T+1 timeline 

An important question for broker-dealers right now is how to transition to a T+1 settlement timeline. Sean McEntee, leader of the Matching and Agreements business for DTCC Institutional Trade Processing (”ITP”), noted that right now there is a full business day to clean up exceptions and with T+1 that time will effectively get reduced to a 5-hour window between the U.S. market’s close at 4:00 PM and the new affirmation cut off at 9 PM Eastern.6 This is especially a problem for foreign markets with the time zone difference. Asia will be most impacted by the move to T+1 since all post-trade activity there would need to be done in two hours. 

Certain broker-dealers may need to make changes to their business operations and incur certain costs in order to operate in the T+1 environment. Some of these changes might involve updating their computer systems and/or deploying new technological solutions. 

ITP is advocating that the best practice for the buy side is to take back the responsibility of the affirmation process from their custodians through its CTM Match to Instruct (“M2i”) workflow.7 There is a huge gap that needs to be closed for those clients that choose to continue to have a custodian confirm on their behalf. The central matching and auto-affirmation in M2i—instead of local matching and affirmation by a custodian or institution—can make the process more efficient, which is what is needed for the T+1 settlement timeline. It allows for a trade to automatically be sent into settlement as soon as it is matched. 

T+0 Goal 

Same-day settlement is not the same as instantaneous settlement. Instant settlement is currently not possible due to technological limitations. However, there are obstacles in trying to do instant settlement even if the technology allows for it. Peter Feltman notes that risk would rise with instant settlement due to massive amounts of cash constantly moving back and forth, as well as the possibility of errors.9 Settlement allows traders to cancel and reverse errors before the securities and cash change hands, and trying to do instant settlement will likely create more operational issues than same-day settlement might. 

It is said that the new T+1 settlement period is just a first step to the goal of getting to a T+0 period. The problem with getting to T+0, however, is that while next-business-day settlement still fits conceptually and operationally into the current framework, same-day settlement does not.8 While it is possible to continue to make a more efficient process through technological advancements and agreements among the market participants, getting to same-day settlement will require an overhaul of the current system. The DTCC has suggested moving processes to later in the day, with DTC night cycle processing three hours later at 11:30 PM on trade date and DTC affirmation cutoff times at 9 PM on trade date.