The countdown to the UK’s T+1 settlement has officially begun!

The UK's Accelerated Settlement Taskforce (AST) has published its final plan for the UK's transition to T+1 by October 2027. While the transition promises greater efficiency and reduced counterparty risk, it also introduces significant operational, liquidity and compliance challenges. 

As the deadline approaches, the key question is: is the UK ready for this change?

What is T+1? 

T+1 refers to the trade settlement period for securities transaction – the ‘+1’ means the transaction must be finalised within one business day from the transaction date. 

Historically, settlements were manual, requiring investors to wait until they received physical certificates, which then needed to be processed. As time went on, markets moved to a T+5 basis, whereby trades took five business days to settle. Market regulators have continuously worked to shorten this window, with most economies moving to T+2 around a decade ago. 

Lessons from the US

Although the US initially lagged in transitioning to T+2, it has since emerged as a leader in the move to T+1, with the SEC officially implementing the change in February 2023. The transition was smoother than expected, with The ValueExchange survey reporting a 30% improvement over initial projections and that the experience offers valuable insights for the UK and other regions as they prepare for their own transitions.

The overall success of T+1 in the US can largely be attributed to early preparation, coupled with industry-wide collaboration and coordination between market participants and infrastructure providers. While the Depository Trust and Clearing Corporation (DTCC) played a central role in guiding the US market, the UK will need to coordinate efforts across multiple institutions to ensure a smooth transition.

Another important lesson is the significance of automation - in the US, automation was not prioritised at the outset, resulting in increased manual processing and exception management. 

Opportunities and challenges for the UK’s financial sector 

Opportunities

• Improved Liquidity
  With securities and cash tied up for shorter periods, liquidity in the market will improve. This will provide greater flexibility for institutional investors, enabling them to reallocate resources and execute trades more swiftly, ultimately enhancing market efficiency.
• Increased Market Efficiency
  Global alignment on T+1 will help create a stronger, more integrated financial ecosystem. Given the ongoing market volatility and concerns over the recent departure of companies and investors from the UK, this shift presents a timely opportunity to restore confidence and drive stability.
• Enhanced Global Competitiveness
  By adopting T+1, the UK will align with international best practices, improving its standing in global markets. A successful transition will boost investor confidence, particularly at a time when the London Stock Exchange has seen a notable outflow of both companies and investors.

Challenges

• Implementation Costs
  The importance of automation is clear when examining the US’s transition to T+1. Smaller firms may face significant challenges in covering the costs of necessary technology upgrades and infrastructure changes, risking falling behind in adapting to the new settlement cycle.
• Cross-Border Coordination
  As different markets transition to T+1 at various stages, the UK will need to ensure close coordination with other regions. Misalignment could lead to inefficiencies, operational disruptions, and complications in cross-border transactions.
• Liquidity Management
  While the faster settlement cycle offers greater liquidity, it also places additional pressure on firms to manage resources effectively. In volatile markets, ensuring enough liquidity to meet tighter settlement deadlines could be particularly challenging, especially for smaller firms.
• Impact on Smaller Firms
  Smaller firms may face greater challenges in adapting to T+1 due to the high implementation costs associated with new systems and processes. This could place them at a competitive disadvantage, as they may not have the resources to fully implement the necessary changes.

By learning from the experiences of the US and other countries which have successfully implemented T+1, the UK can position itself for a smooth and successful transition. 

The AST’s plan also shows promising signs, with a strong emphasis on automation and early implementation. The plan outlines five behavioural commitments, which include a push for automation in SSIs, corporate actions, stock lending recalls, and urging firms to start planning and where possible, implement changes immediately.

The road ahead will require careful planning, investment in technology, and a commitment to flexibility – but the long-term advantages are a faster, more efficient settlement system, which could play a key role in repositioning the UK as a financial powerhouse.