T+1: Balancing Efficiency, Risk, and Global Coordination

As the United States implements a T+1 cycle, with the settlement of security transactions occurring on the transaction date plus one day, the country is poised to achieve a significant milestone. Successful preparation for the cycle, which took effect on May 28, has engendered industry-wide collaboration, development of proactive risk management strategies, and the adoption of new systems, all crucial to optimizing trade operations and mitigating market disruption. However, it has not been without challenges. Many market participants still rely on legacy systems and batch processing, which may not be compatible with the real-time processing requirements of T+1 settlement. Upgrading these systems has been costly and time-consuming. That said, the shift toward a shorter settlement cycle is a natural progression that aligns with the rapid technological advancements in the financial industry over the past decade. This includes the expansion of electronic trading and real-time processing capabilities. 

While the United States is leading this transformation, Europe and Asia are lagging. The misalignment of settlement cycles (e.g., T+1 vs. T+2) across global jurisdictions creates complexities that increase systemic financial risk in Europe's foreign exchange market. According to a recent survey conducted by the European Fund and Asset Management Association, whose member firms collectively manage 28.5 trillion euros ($31.06 trillion in U.S. dollars) in assets, the new T+1 settlement system would force 40% of asset managers' daily FX trades to settle outside the CLS multi-currency platform—the world's largest multi-currency settlement system. This implies an increased risk for manual intervention, error, and delay, and the potential for liquidity issues. Over the next few weeks, global FX markets could become a catalyst for greater U.S. market instability post-transition.