Financial markets are relentlessly pushing the boundaries of settlement cycles. When this happens, we see a ripple effect that can transform everything from institutions to regulation. China is at the forefront, leading with its T+0 real-time settlement system. India implemented T+1 settlement in early 2023 and introduced a voluntary T+0 settlement cycle in March 2024, with the potential for instant settlement by 2025.
The T+1 move in the North American markets intensifies pressure on UK regulators, who have committed to adopting T+1 by 2027, and on European regulators, who are still considering a move.
The European Securities and Markets Authority (ESMA) is currently collecting evidence for a potential shift, and the European Fund and Asset Management Association (EFAMA) has underscored the need for alignment between the EU and UK to avoid settlement mismatches that could disrupt capital flows and efficiency.
Europe is experiencing both the advantages and difficulties associated with transitioning to a T+1 settlement cycle in global markets. Advantages include reduced counterparty risk and improved liquidity, recurring hurdles include operational complexities, strains in liquidity management, and the coordination required between international markets.
Operational and financial risks: Underestimating the impact of T+1
One major lesson we can learn from markets that have transitioned to T+1 settlement is the need to understand the operational and financial risks. Gary Wright, is the Director of ISITC EUROPE and a member of the T+1 UK Technical Task Force, he says:
“Firms that assume they are insulated from these changes are likely underestimating how interconnected the global securities markets are. Even retail investors could face increased costs if firms are not prepared, as inefficiencies and operational gaps drive up expenses across the ecosystem.”
The drivers behind the shift to T+1
Several key factors have accelerated the push toward T+1 settlement cycles, with efficiency and risk reduction at the forefront. Events like the GameStop trading frenzy in 2021 underscored the vulnerabilities of the T+2 cycle. The volatility during that period forced regulators like the U.S. Securities and Exchange Commission (SEC) to reconsider whether a two-day settlement cycle was still appropriate for today’s high-speed, high-frequency markets.
There’s also growing pressure from institutional investors for faster settlement, particularly as digital assets and blockchain-based technologies become more common. Shorter settlement times limit the duration of exposure to counterparties and reduce risks associated with price fluctuations, defaults, and market disruptions.
Answering your T+1 questions
We saw record sign-ups from senior finance professionals for our webinar about the impact of T+1. Many are seeking to avoid a ripple effect of inefficiencies caused by shorter settlement times, Audience questions spanned from liquidity management and technology upgrades to risk management strategies and cross-border settlement coordination. Here’s what your firm needs to know:
1. How important is technological readiness for the successful implementation of T+1, and what challenges do firms face?
Technological readiness is critical for managing T+1. Many firms still rely on outdated systems with batch processing, which are inadequate for the demands of a shorter settlement cycle. For T+1, and future transitions toward T+0, real-time processing is essential. Firms must upgrade their systems to allow faster reconciliations and better liquidity management.
Blockchain technology offers an opportunity, providing real-time, immutable settlement options that could support future T+0 models. However, adoption remains low, and substantial infrastructure investment is required before such technologies can scale. Therefore, while the potential for real-time settlement exists, the industry faces considerable hurdles in updating legacy systems to meet the demands of T+1 and beyond.
2. What are the key risk management challenges associated with T+1 settlement, particularly in light of increased volatility and liquidity risk?
Risk management under T+1 presents notable challenges. Citi’s survey of institutional investors and market participants revealed that nearly 60% of firms express concerns about increased volatility and liquidity risk. Shorter settlement cycles leave less room for error, heightening volatility and operational risk.
Gary Wright of ISITC and Nick Applebee, a liquidity expert at Planixs, stress that traditional end-of-day risk assessments will no longer suffice. To mitigate risks, firms must adopt real-time systems capable of continuous monitoring and rapid responses to market changes, ensuring they can manage heightened volatility efficiently.
3. What is the impact of T+1 settlement on a bank treasury’s liquidity management processes, specifically intraday liquidity management?
The impact on a bank’s treasury and intraday liquidity management is significant. As the financial markets move toward T+1 and eventually to real-time settlements, there is a growing need to fuse capital market assets with liquidity management. Under T+1, banks must adapt their treasury operations to manage liquidity more efficiently because the time frame for settling transactions is compressed.
“Massively reducing settlement times creates lots of pain. You have less contingency to work out how much liquidity you need and where you need it, and you have less time to fix problems and avoid fails. So make sure you are tracking liquidity and settlement in real-time, all the time.” — Pete McIntyre, liquidity expert at Planixs
The challenges are compounded on an international scale, where assets and liquidity move across different time zones. Banks must manage not only their local liquidity but also the liquidity tied up in international transactions, making it essential to have real-time data and visibility into these positions. The inefficiency often stems from the fact that data may not be available precisely when needed, leading to suboptimal liquidity management. Access to accurate, real-time data is therefore critical in this environment.
4. Was the increase in costs for investors due to T+1, including wider spreads and treasury impacts from increased funding, predictable, and has it exceeded expectations?
According to research by ISITC Europe, there has been an increase in costs for investors since the move to T+1, and the increase in costs was predictable. Director, Gary Wright, states that while costs were anticipated by some, no comprehensive industry benefit analysis was conducted prior to implementation. This meant the market, especially on the buy-side, was unprepared. Wright says that market participants underestimated the costs because the emphasis was placed on settlement efficiency rather than the funding and treasury impacts. As a result, investors, particularly those on the buy-side, have been caught off guard.
Furthermore, the scale of the cost increase has been higher than many expected. An open ESMA meeting, suggested that spreads have increased by between four and five basis points, although other reports suggest that the costs might be even higher. These costs are not limited to spreads alone but also include significant treasury funding expenses. The full extent of the financial impact is not yet fully known.
5. How much of this additional cost will disappear when the EU and UK move to T+1?
The move of the EU and UK to T+1 settlement is expected to alleviate some of the additional costs currently faced by investors due to the discrepancies in settlement times across different markets. Wright indicates that some of these costs will disappear when the EU and UK align with the US and other markets. One of the primary benefits will be the reduction in the need for overnight funding, as settlements will occur on the same day, thus freeing up liquidity more efficiently.
However, not all costs will be eliminated. Wright explains that there will always be an element of funding costs that persist. For instance, due to the time zone differences, the US market has a cut-off time of 9:30, which poses a challenge for transactions from the EU and UK. The difficulty in getting all transactions processed by this cut-off time means that funding costs will still be a factor to some extent. The remaining costs are therefore largely structural and related to the logistics of international markets operating across different time zones.
Additionally, even with a move to T+1, the necessity for real-time processing remains. Wright argues that to truly achieve the benefits of T+1, the industry needs to move towards real-time processing and move away from batch processing, which inherently creates delays and additional costs. Thus, while some cost savings are expected with the EU and UK moving to T+1, there will still be challenges with increased operational expenses.
6. What does best practice look like when it comes to managing additional costs from T+1 – for example, have you seen many firms setting up new trading desks?
T+1 settlement is introducing additional costs, prompting firms to review how to mitigate these expenses.
Wright points out that instead of investing in new technology or systems to cope with the transition, banks often choose the faster route of hiring personnel to manage the new processes manually. This approach has the drawback of inflating overhead costs, which, in turn, can affect the banks’ profitability and operational efficiency.
Best practices in the UK and EU will likely shape many of the recommendations from the UK T+1 Task Force, but whether these solutions will come with regulatory enforcement remains to be seen. What’s clear is that the additional costs of T+1 are likely to persist for several years, raising the critical question of who will ultimately bear these expenses.
The impact of T+1 in the U.S. has already led some larger firms to open offices there, while others have had to retain increased capital in the U.S. to cover settlement transactions. This is especially costly for firms in the Asia-Pacific region, with implications for operational costs and market liquidity, as investors are left with less capital to deploy.
Additionally, while some firms have created overnight or regional desks to handle cross-border settlements and liquidity management, especially for currency-related operations, the trend is moving toward more technological innovations. This includes real-time processing systems, FX risk management tools, and liquidity management technologies to improve operational efficiency and reduce the burden of manual interventions.
7. A high proportion of respondents to a Citi survey published earlier this month said they had diverted staff to FX teams to cope with the switch to T+1. Are you surprised by this finding?
No, this finding is not surprising. According to Gary Wright, the market’s typical response to any significant change, such as the transition to T+1, is to hire additional staff to manage the increased workload. This reliance on human resources is a traditional approach within the industry, which often leads to a significant increase in operational costs. In the context of T+1, firms have diverted staff to their FX teams as a way to handle the complexities and pressures of the new settlement environment.
Furthermore, the increased costs associated with diverting staff are not a short-term blip. If the market volume continues to grow or the international markets do not change in sync with T+1, these costs may persist. Wright suggests that the industry needs a full year to understand how these changes will pan out truly, but he anticipates that the increased costs associated with employing more staff to handle T+1 settlement may become a long-term issue rather than a temporary adjustment period.
8. Has the introduction of Bloomberg’s benchmark on value T+1 FX fixing rates been a positive development?
Bloomberg’s benchmark allows banks and other market participants to measure their costs against a recognized standard, thereby enabling better internal analysis and cost management. Wright says that ISITC Europe’s work involves creating an industry benchmark for anonymising banking costs to offer a clearer picture of the industry’s operational expenses.
9. Would a change to CLS Settlement cut-off times reduce the cost of FX funding for investors outside the US?
A change to CLS (Continuous Linked Settlement) settlement cut-off times could theoretically reduce the cost of FX funding for investors outside the US. However, Wright clearly states that this change is unlikely to happen. The primary function of CLS is to provide a secure, risk-reducing mechanism for settling foreign exchange transactions. Currently, FX settlements within CLS are on a T+2 basis, and there is no momentum within CLS or its member banks to move to T+1.
Wright emphasises that CLS is a cooperative owned by major banks, and this presents a conflict of interest. On one side of the CLS board, there are banking executives focused on the profits generated from payments and FX through CLS. On the other side are representatives from investment banks and asset management who would benefit from reduced costs if settlement cut-off times were changed. The profits generated by CLS through its current practices are substantial, and as such, the member banks are unlikely to push for a change that would diminish this revenue stream.
Furthermore, despite the numerous discussions and meetings on this topic, there is no appetite or pressure within the CLS framework to adapt to a T+1 structure. Therefore, while a change to CLS settlement cut-off times could reduce costs for FX funding for investors outside the US, it is unlikely to occur due to the vested interests and structural inertia present within the current system.
10. What are the prospects for T+0 settlement, and what challenges will firms face in making this transition?
While the move to T+1 is a significant step toward faster markets, many experts believe that T+0—real-time settlement—is the next frontier. Technologies like blockchain, which enable instant settlement, offer a glimpse of how T+0 could nearly eliminate counterparty risk. However, the transition to T+0 comes with substantial technological and operational hurdles.
Firms will need to overhaul their infrastructure to handle real-time processing, requiring major changes in how liquidity, collateral, and risk are managed. Without real-time systems, the potential for bottlenecks and operational failures will increase, making it a complex yet inevitable future goal for the industry.
Watch the T+1 webinar here.