TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
On May 28, securities transactions in the U.S. saw a significant change as regulators officially required settlements to take place in one business day of their transaction date.
The jump from the previous two-business days requirement to a so-called “T+1” mandate is ushering in improved efficiency and decreased risk for U.S. transactions. It also means new investments and processes for a range of industry participants.
To dive deeper into what the transition means for both market participants and Nasdaq, the Newsroom team sat down with Giang Bui, Vice President and Head of U.S. Equities and Exchange-Traded Products at Nasdaq.
Nasdaq Newsroom: First and foremost, what is happening with the settlement cycle transition, and why is it happening?
Giang Bui: For every transaction in a security, there’s a trade date which is the date the execution occurs and then there’s a settlement date, which is the date when the trade is finalized, and the funds and the securities are delivered. Currently in the U.S. the difference between the trade date and the settlement date is two business days. This “T+1 settlement transition” refers to the change in timing between the trade date and settlement date. So, it will move from two business days (“T+2”) to the next business day after the trade date (T+1).
The goal for the T+1 transition is really to reduce risk as well as increase efficiencies in the marketplace.
Nasdaq Newsroom: Why is this happening now?
Giang Bui: The settlement timing has reduced over the years. In 2017, the settlement timing moved from T+3 to T+2. So, as technology evolves, and as there’s more trading in the markets – especially through the heightened volume and volatility of 2020 – there’s more urgency now to move to T+1.
Following that volatility, the Securities and Exchange Commission (SEC) felt that T+1 would reduce counterparty risk by shortening the time between when the security and money are exchanged. As a result, in 2023, the SEC adopted rule amendments to shorten the standard settlement cycle for securities that currently settle T + 2 to a T + 1 settlement cycle with a May 28, 2024 compliance date. Separately, The Canadian Capital Markets Association shortened the standard settlement cycle for most trades in securities in Canada to a T + 1 settlement cycle effective May 27, 2024.
Nasdaq Newsroom: You mentioned reduced risk and increased efficiency from this transition. Can you explain that a bit more?
Giang Bui: The T+1 transition is expected to benefit investors as well as the marketplace in three main ways.
The first piece, as mentioned earlier, is around counterparty risk or settlement risk, particularly during times of volatility and heightened volumes. And then the second piece is with the reduction in risk – by allowing for a reduction in margin requirements, firms can better and more efficiently use their liquidity and capital.
The third is a potential increase in operational efficiencies. While there may be some initial operational challenges, in the end, technology adoption will likely occur. This adoption may include automating certain processes that will allow settlement to be quicker at T+1, reduce operational risk, increase productivity, and create more standardization of industry practices. With the shortened time frame, the industry will need to invest in improving the technology and workflow behind everything related to settlement. Given this, there will likely be a long-term cost reduction once automation and process improvements are implemented.
Nasdaq Newsroom: What does the T+1 transition mean for everyday market participants?
Giang Bui: The transition’s benefits to increased efficiency and reduced risks will ultimately apply to even individual retail investors. Still, they are unlikely to see a change in their buying and selling workflow – they already have to fund their account beforehand if they are making a trade through a brokerage account. But the change will be felt in all of the supporting ecosystem around their trading.
Nasdaq Newsroom: And how has Nasdaq been working with that ecosystem to ensure a smooth transition?
Giang Bui: From a Nasdaq standpoint, we were well prepared for the shift to T+1 across all the markets we operate that are making this transition. To ensure that market participants were well prepared, we opened our testing windows for firms beginning August of last year, we encouraged firms to come in, and we hosted open calls to answer any logistic questions.
Nasdaq Newsroom: For Nasdaq, specifically, what has the transition involved?
Giang Bui: As an exchange operator in the U.S., our role has been to support the trading ecosystem and make updates to certain reporting workflows.
Importantly, we also have the Nasdaq Trade Reporting Facility (TRF), where we operate the first and largest U.S. equities trade reporting facility. The Nasdaq TRF electronically facilitates trade reporting, trade comparison and clearing of trades for all U.S. equities. The platform handles transactions negotiated broker-to-broker, or internalized within a firm.
We have been investing into the TRF, including our best-in-class front-end system called WorkX, and into the team that supports this important market platform since its inception, positioning us and our clients for a smooth transition to T+1.
Want to learn more about Nasdaq Trade Reporting, Monitoring, and Risk Controls? Read about WorkX here.
