In February 2025 it was announced
that the EU will switch to single-day settlement – otherwise known as ‘T+1 settlement’ – of stock and bond trades in 2027. So what does this mean and why is it important?
‘T+0 settlement’ refers to a same-day settlement in stock markets; T+1 refers to a settlement in the stock market that takes a maximum of one day; T+2 refers to a settlement that takes two days; and so on and so forth. A settlement is the process of transferring
securities and funds between buyers and sellers after a trade is executed. The shorter the settlement cycle, the faster investors can access their securities and funds.
It should be noted that T+0 settlement is not the same as instantaneous settlement. An additional step of regulation and infrastructure would be required to institute this.
Settlement in the UK and the EU
Since 2014, the UK and the European Union (EU) have observed a T+2 standard. If, for example, an investor buys shares in the UK stock market on a Monday, she will receive them in on Wednesday – two days after the trade execution. Similarly, if shares are
sold on Monday, their value will appear in her bank account on Wednesday.
There are some outliers. UK government bonds, for instance, settle on T+1, while UK mutual funds settle on T+3 or T+4.
In September 2024, the
Accelerated Settlement Taskforce published a report, which included draft recommendations on the legislative, regulatory, technical, and operational changes required for the UK to move to a T+1 standard for settling securities trades. The Financial Conduct
Authority (FCA) welcomed the recommendations,
writing on 19 February that “the UK market intends to move to a T+1 settlement cycle on 11 October 2027. T+1 will make our markets more efficient, and we support this.”
The European Commission’s proposed date for the EU’s
transition to T+1 settlement is also 11 October 2027, and the European Securities and Markets Authority (ESMA) has launched a
consultation on a set of proposals to amend the technical standards on its settlement discipline regime.
The US, Canada, Mexico, and Argentina transitioned to T+1 settlement in May 2024.
The benefits of faster settlement
Clearly, stock markets around the world are trending toward instantaneous settlement. But what would be the benefit?
First, the time lag between trade execution and settlement is greatly reduced, enabling faster fund remittances. Intra-day settlement helps investors liquidate stocks instantly – boosting liquidity for the markets. In addition, the shorter the settlement
cycle, the lower the exposure to – and probability of – default or delay risk from the counterparty. More generally, faster settlement processes make for more nimble and dynamic stock markets.
There are
demerits, however. Shorter settlement cycles can cause market volatility – particularly during periods of high trading activity. They can also impact on the business models of brokers, who rely on interest income from clients’ funds. Finally, to install
T+0, large-scale, costly, and complex changes in infrastructure, systems and processes are necessary. These factors have deterred many countries from making the switch.
India’s
$5 trillion stock market, for example, moved to T+2 settlement in 2003 – 14 years before the US. In January 2023, India became the second country, after China, to adopt T+1. While the UK and the EU play catch-up, India has almost finished rolling out T+0.
How to implement T+0
What infrastructure changes underpin T+0 settlement? There are three pre-requisites:
- A real-time payment system;
- Online depositories; and
- Robust technology stacks.
Indeed, real-time systems are critical to enabling instant fund transfers between banks and platforms, while online depositories are needed to hold securities in electronic form and facilitate their transfer. Powerful technology infrastructures are also
necessary to support high-speed and high-volume trading and settlement activity.
In India – one of the leaders of short-cycle settlement – the Securities and Exchange Board of India (SEBI) approached T+0 settlement implementation in a phased manner, commencing in March 2024 for just 25 scrips; a limited number of brokers; and only for
trades between 9:15 am to 1:30 pm. This beta approach was reviewed by SEBI after three and six months. With all going to plan, SEBI
continues to add stocks to the T+0 settlement test.
What should firms do?
Shorter settlement cycles can mean new business opportunities, if firms plan early and consider a full gamut of responses, such as budgetary considerations, system updates, testing, as well as counterparty arrangements and agreements with third-party providers.
The appropriate reaction by firms to updated settlement cycles will depend upon the jurisdiction in which they trade and the regulations surrounding it. Firms should engage with the recommendations of the relevant advisory bodies to understand how changes
in settlement cycles might impact them.