The American stock exchange is returning today, Tuesday, May 28, 2024, to a transaction settlement speed last seen a century ago. Interestingly, this change is not about slowing down but rather accelerating the process by transitioning to a system known as T+1.
USA Returns to T+1 Settlement Cycle
For the first time since the early 1920s, New York Stock Exchange shares will be settled within a single day. The decision by the Securities and Exchange Commission (SEC) has led Wall Street to revert to this faster settlement system after a 100-year hiatus.
What does this mean? Primarily, the time to complete each transaction will be cut in half. The US shifted to a T+2 system when market activity became too high to manually settle transactions daily. If you bought shares on Monday in recent decades, the transaction would be settled by Wednesday.
Now, with the T+1 model taking effect, the same transaction must be settled by Tuesday. For months, this change has sparked debate among investors and businesses tied to the stock market. There are concerns that foreign investors may not have enough time to secure the necessary dollars for transactions, and there will be less time overall to correct potential errors.
Although the SEC hopes for a smooth transition, it warned last week that implementing T+1 might initially cause a "short-term uptick in settlement fails and challenges to a small segment of market participants."
"Ultimately, the idea is that a shorter settlement time will reduce risk in the financial system, as a shorter settlement time means that there is less chance of something breaking in the settlement period," commented Kathleen Brooks, the Research Director at XTB. "The biggest risk is the FX impact, especially if there are large flows from overseas into US stocks."
Wall Street Also Remembers T+5
While T+1 was last the norm on Wall Street in the 1920s, the system did not last long. The need for manual transaction settlements could not keep pace with the booming trading activity during that period. At times, the settlement period was even extended to T+5.
In 1987, the cycle was changed to T+3 after Black Monday, when US and global stock markets crashed. The most recent change occurred in 2017 when the settlement was reduced to T+2 to align with more modern, dynamic, and digital markets.
The change also took place yesterday (Monday) in the Canadian and Mexican markets without causing significant issues. However, it is important to note that Wall Street is a much larger market that attracts many foreign investors.
