Financial Services Association, May 28 (Editor: Zhao Hao) Starting Tuesday (May 28), the US stock market's trading settlement cycle will officially be shortened from T+2 in the past to T+1.

Previously, US stocks implemented a T+0 trading system and a T+2 settlement and delivery system, where investors bought a stock and were able to sell the stock on the same day, but the settlement of the transaction was not completed immediately; it took two days for the funds to be transferred to the account. Simply put, according to the original rules, investors sell stocks this Tuesday and can only withdraw on Thursday.

Starting today, the settlement cycle for US stock trading will be shortened from T+2 to T+1, that is, investors who sell stocks will be able to receive settlement funds on the next trading day. Simply put, according to the new rules, investors sell stocks this Tuesday and can withdraw them on Wednesday. This is of great significance in improving capital liquidity and transaction efficiency.

Source: SEC

Over the long term, the US Securities and Exchange Commission (SEC) has been shortening the time required for the settlement process, from about five days in the 1990s to the T+2 settlement system. According to the SEC's previous statement, the reason for the further adjustment to T+1 was mainly the trading boom in “retail group stocks” such as Game Station in early 2021.

At the time, retail investors bought these stocks in large numbers. As stock prices and their trading volume and volatility increased, US online brokerage firm Robinhood began restricting investors from purchasing these stocks, triggering strong opposition from retail investors and scrutiny by the US Congress, which eventually prompted regulators to decide to shorten the settlement cycle by half.

According to the SEC, a shorter settlement window means lower margin requirements for brokers, and the risk of high volume or volatility forcing brokers to restrict trading will also be reduced. On Monday local time, the settlement cycle in Canada and Mexico has switched from T+2 to T+1 in line with changes in US regulatory rules.

In terms of risk, the most intuitive thing is that the time to fix errors will also be reduced. The SEC also acknowledged last week that the transition may lead to a short-term increase in transaction failure rates, posing a challenge to a small number of market participants. In response, the American Securities Industry and Financial Markets Association (SIFMA) has established a “T+1 Command Center” to identify problems and coordinate responses.

Tom Price, Sifma executive, said, “There are many dependencies within the industry, and individual companies may experience rough patches. But I'm encouraged that overall, the company is increasing staffing to ensure that employees are not at the beach during the transition period, but in the office.”

Also, since most foreign exchange transactions are still in the T+2 delivery method, changes in US stocks may have an impact on the global foreign exchange market, especially during the dawn of the Asian session, which is usually quiet. Citibank executive Michael Wynn said that foreign exchange liquidity may change in the short term, “but as we enter normal business processes, liquidity will improve.”

In addition to this, one of the most urgent tests is the “double settlement day” this Wednesday. Last Friday's T+2 transactions and Tuesday's T+1 transactions needed to be settled within one day.

Christos Ekonomidis, T+1 Program Director at Bank of New York Mellon said, “We are ready for the wave of expectations. We know there will be issues with this transition, so we need the right resources to quickly address them.”

Editor/Somer