Shortening the settlement cycle for securities has advantages but needs careful handling to ensure that it does not do more harm than good. This paper analyses why, and what to do about it. It is designed to draw out the lessons from the transitions of 2023 and 2024, and to provide a template for any countries looking to shorten their own settlement cycle in a safe and efficient manner.
The settlement cycle, which represents the period between the execution of a trade and its settlement (i.e. the time that market participants have obtain the money for a security), plays a crucial role in the functioning of financial markets. In recent years, jurisdictions have sought to shorten settlement cycles, aiming to reduce residual market risk, enhance liquidity, and modernise market technology. Recent transitions to a T+1 timeframe (Trade Date plus one day) have demonstrated improved efficiency, as well as reduced margin requirements and fund contributions from market participants. However, numerous challenges exist regarding industry preparedness and coordination, especially in regards to cross-border impacts on certain instruments and asset-classes. When considering the lessons learned from recent transitions, the WFE recommends that regulatory bodies conduct thorough impact assessments and determine operational readiness in conjunction with industry before committing to such transitions. Any plans should incorporate feedback from market infrastructure providers such as CCPs, particularly on issues such as potential timelines and system-wide testing or pilot programs. The WFE also advises that theoretical moves to models such as T+0 or atomic settlement do not represent a logical next step for serious consideration at present.
