The Road to T+1 Settlement

The UK’s transition to T+1 settlement is a significant undertaking which aims to benefit investors, financial markets and the economy.

The Accelerated Settlement Taskforce (AST), the body charged with enabling this transition, recently published an implementation plan which sets out the changes their members believe market participants need to deliver and contains a recommended UK T+1 ‘live date’ of 11 October 2027.

Here we look at why the move to T+1 is an important step and where the main benefits lie.

International competitiveness

If the UK wishes to maintain its competitive position as a leading global financial hub, it needs to ensure that it is aligned with other progressive, forward-thinking financial centres.

Many of the major markets around the world have already moved to T+1 settlement.  China was the first market to adopt T+1 DVP in December 2022, India moved to T+1 at the start of 2023, and the US, Canadian and Mexican markets adopted T+1 as their standard settlement period in May 2024. The EU and Switzerland have decided to move to T+1 on 11 October 2027, to align with the UK.

The benefits of moving to T+1 settlement?

For investors, it will reduce risk, increase efficiency, enable clients to achieve faster access to their funds or securities and, due to the shorter settlement cycle, reduces exposure to credit and counterparty risk.

For financial markets, a shorter settlement cycle can reduce costs related to collateral and trading operations, increase efficiency by eliminating delays in the trading and settlement processes and promote more effective use of capital and the reduction of margin requirements.

For the economy, T+1 can increase overall market liquidity and enhance resiliency

Why is this report such a milestone achievement?

Given that the AST participants and their firms have their own priorities, including focusing on regulatory change, managing clients and building their businesses, persuading the market to focus on T+1 and agree an implementation plan and Code of Conduct has involved a lot of skilful negotiation, but also a willingness on the part of firms to work together to achieve an agreed approach that functions well for everyone.

Andrew Douglas, as Chair of the Accelerated Settlement Taskforce Technical Group, has marshalled the forces of 450+ representatives from 116 market participant firms, and managed the process of gaining agreement to:

• the scope of changes needed to the UK Central Securities Depositories Regulation (UK CSDR);
• a UK T+1 Code of Conduct, which contains the scope and a timetable of recommended actions to enhance market practices;
• a set of expected behaviours necessary for firms to meet their T+1 legislative obligations under UK CSDR; and
• twelve critical actions in four business areas, which all participants need to implement to ensure a successful and sustainable transition to T+1.

Learning from the US experience

By publishing the implementation plan now – effectively, a roadmap for firms to follow going forward –  the AST has given UK firms considerable time to prepare.

Whilst the US, Canadian and Mexican markets’ move to T+1 in May 2024 was considered a very successful venture, the scope of the project was not clearly defined and agreed until just three months before live date. Some firms were obliged to hire in extra staff to help them manage in the early days, because they hadn’t had the time to fully prepare.

Some firms may choose to move some or all of their transactions to T+1 in advance of October 2027, so they have the opportunity to trial the process, but with the option to fall back to T+2 if they encounter any issues.

What is the impact on PIMFA members?

For PIMFA members, settling T+1 is familiar territory – transactions in Gilts are already settled on T+1, as the standard settlement cycle for gilt edged securities.  Euroclear’s CREST system, which settles UK equities transactions, already has the capacity to settle T+1 today, so the settlement systems are in place, tried and tested.

When reading the AST report, PIMFA firms should consider the twelve critical actions across four business areas listed and decide which they need to act upon.  Some will not be relevant – many PIMFA members are not involved in activities such as securities financing / stock lending.  However, there are other areas worthy of consideration.

Whilst firms can already settle T+1, the volume of these transactions is currently quite low.  Many firms will not have tested their capacity and ability to process high volumes of transactions that settle T+1, because there has never been a need to do so.  Firms may want to consider moving to T+1 settlement for some of their equity transactions in advance of the 11 October 2027 T+1 ‘live’ date, so ironing out any bottlenecks or issues, ensuring their processing works seamlessly and is ready by the launch date.

Firms may also want to consider how they are going to explain the move to their clients, and confer with their counterparties, to ensure everyone is on the same T+1 page.

11 October 2027 may seem a long way off, but the next twenty months will fly by – now is a good time to start planning for UK T+1 settlement and thinking through the impact on your firm, your clients and your counterparties.

 

PIMFA runs a T+1 working Group for its members and associates – if you would be interested in joining in, please contact mailto:info@pimfa.co.uk.