(News Bulletin 247) – Since Tuesday, purchases of many securities such as stocks and bonds have been settled one day after the order placed and no longer two as before, on Wall Street. This initiative led by the policeman of the American Stock Exchange aims to limit the risks of default.

Wall Street experienced a paradigm shift on Tuesday. Since that day, the settlement period for a large number of securities on the American markets has been shortened by one day following an initiative adopted in February by the watchdog of the American Stock Exchange, the SEC (Securities and Exchange Commission).

Concretely, the United States went from “T+2” to “T+1”, the letter “T” referring to the date on which a stock transaction was made.

As the SEC very well points out on its site, the “settlement” corresponds to the official date of transfer of the security to the buyer’s account and the remittance of the funds to that of the seller, which previously occurred two business days after the transaction date. “In ‘T+2,’ if you sold ABC stock on Monday, the transaction will settle on Wednesday,” explains the SEC.

Settlement therefore now takes place the day after the transaction (or more precisely the next business day).

Historically, the watchdog of the American Stock Exchange had established a settlement cycle at T+3 in 1993 (compared to T+5 previously) before shortening it to T+2 in 2017.

The T+1 will concern stocks, bonds, ETFs or even securities issued by municipalities, specifies the SEC.

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Limit the risks

Why did you decide to go a step further? The American regulator believes that “T+1” will reduce counterparty risk, that is to say that a seller or buyer defaults on their commitment and therefore the transaction fails.

“Shortening the settlement cycle benefits investors and reduces the credit, market and liquidity risks faced by market participants in securities transactions,” SEC Chairman Gary Gensler said in a statement published on May 21. .

Bloomberg and Reuters both explain that this decision was also motivated by the fever on the “meme stocks” of 2021, in particular on the action of the video game distributor Gamestop. Individual investors then banded together on forums to massively buy group shares that they liked, thus forcing short sellers to throw in the towel. This resulted in dizzying increases (+2,000% for Gamestop), disconnected from the fundamentals of the companies in question.

Problem: brokers, including Robinhood, a popular platform for individuals in the United States, must deposit funds in guarantees (collateral) with clearing houses to cover the positions of their individual clients during the two-day period linked to the “T +2”. With the explosion of orders placed on certain stocks, Robinhood had to restrict trading on certain “meme stocks” to ensure that it had sufficient collateral. This earned him strong criticism from American stock market traders and attracted the attention of Congress, Bloomberg recalls. The “T+1” reform could therefore reduce the risk if such episodes were to recur.

What about other countries?

If the “T+1” therefore theoretically possesses certain virtues, difficulties cannot be ruled out. The SEC recognized that its implementation could pose certain problems in the short term. Gary Gensler, himself, pointed out that “the move to a shorter settlement cycle may result in a short-term increase in settlement failures and difficulties for a small segment of market participants.” Bloomberg quotes another SEC member, Mark Ueda, who explained that “speeding up settlements would leave less time for participants to correct errors in the transaction process and for regulators to block potential proceeds of fraud.”

As for countries outside the United States, Europe has adopted T+2 since 2014 (since 2010 for France), according to John Plassard, investment advisor at Mirabaud. However, the European Securities and Markets Authority (ESMA) launched a call for contributions from market participants in 2023 to shorten the settlement cycle. Last March, the authority published a first “mixed” report on the impacts mentioned by the market players who responded to its call.

Market participants were “divided” on the issue of T+1, noted Société Générale in April. ESMA must deliver its final opinion on the subject to the European Parliament by January 17, 2025.

“The synchronization of different currencies, central securities depositories, central counterparties and trading venues makes the possible European T+1 much more complex than the American version,” underlines John Plassard.

On the United Kingdom side, a special working group was set up at the end of 2022 with a report delivered at the end of March 2024. This document recommended the adoption of T+1 with implementation by the end of 2027 , recommendations which were accepted by the British government. A group of technical experts must now assess the modalities necessary to ensure the transition to T+1.

Furthermore, according to Reuters, India and China have already implemented this one-day settlement cycle while Canada, Mexico, Argentina, and Jamaica adopted it on Monday, one day before the UNITED STATES.

As for the question of whether “T+0” can one day win over the markets, the answer seems quite clearly “no”. The Securities Industry and Finance Markets (Sifma), a group which represents several market players in the United States, has devoted a long, detailed analysis to this subject. If this organization considers “T+1” “optimal”, “T+0” would, according to it, pose a significant number of risks for limited benefits. She cites in particular greater transaction failures, due to lack of time to correct potential errors, and a possible increase in fraud or cybercrime. ESMA has also completely ruled out this option in the consultation it is carrying out.