Close on heels of India, US switches to T+1 trade settlement cycle

Growing pressure on global regulators to shorten settlement cycle, say experts

The US has announced a transition to a shorter T+1 (trade plus one day) settlement cycle. The US Securities and Exchange Commission (SEC) decided to shorten its settlement cycle to one day by May 28, 2024.

The SEC announcement comes barely weeks after India transitioned all listed stocks to a T+1 cycle, from the earlier T+2.

“The final rule is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants,” said SEC in a statement on Wednesday.

Market observers say the Indian securities market has been ahead of the curve when it comes to improving trading infrastructure.

The phased transition to the T+1 cycle in India started in March 2022 after the domestic regulator — the Securities and Exchange Board of India (Sebi) — formalised the rules in the form of a circular in November 2021.

Meanwhile, the US regulator had proposed the T+1 cycle only in February 2022.

“I support this rule-making because it will reduce latency, lower risk, and promote efficiency, as well as greater liquidity in the markets,” said SEC Chairperson Gary Gensler.

Gensler added that the adoption is part of the Commission’s response to the meme stock events of 2021.

The SEC believes that substantial progress has been made towards identifying the technological and operational changes that are necessary to establish a T+1 settlement cycle.

Sivananth Ramachandran, director-capital markets policy, CFA Institute, says there is growing pressure on global regulators to condense the settlement cycle.

“The US SEC started focusing on it as a response to the GameStop episode and margin pressure which nearly bankrupted a few brokerages, including Robinhood. Sebi’s motives, in addition to risk management, are also being proactive and in line with a Digital India thrust,” he added.

The US moved to a T+2 cycle, from T+3, in 2017, while India has been following the T+2 cycle since April 2003.

Sebi, under the leadership of Madhabi Puri Buch, has taken several technology-backed initiatives to enhance the efficiency of the domestic securities markets.

The Indian mutual fund industry has also shifted to a T+1 cycle for redemptions.

Sebi has also initiated the ambitious project of extending the purported ‘application supported by blocked amount’ for secondary market trading.