(Bloomberg) — The seemingly smooth transition to a faster settlement regime for U.S. stocks has not been smooth sailing for many players in the sector this year, Citigroup Inc. said.
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A survey of market participants found that the transition to the T+1 system in late May was more difficult than expected, from overhauling obscure financing processes to moving traders across oceans.
The scale of the changes required — which affected multiple departments including finance, FX and securities lending — surprised many in the industry, the poll found. Meanwhile, the impact of the change appears to have been felt unevenly, with asset managers facing higher funding costs while banks and other intermediaries saw their costs fall.
“Every area appears to have been hit harder than originally anticipated, from financing to staffing, securities lending and default rates,” the Wall Street bank’s securities department said in a report released Wednesday. “Capital budgets have been diverted, noncritical projects have been delayed and essential resources have been borrowed.”
The T+1 shift was a global event for the financial industry, as it affected every institution and investor with money in the U.S. capital markets. The change brought with it a series of challenges, including a significant reduction in the time available to complete key steps of the trading process.
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Extensive preparations have made for a seemingly smooth transition, but Citi’s research suggests the work is not yet done. The bank found that 33% of projects related to the T+1 shift — mostly in the form of further automation and additional hiring — have yet to be implemented and are likely to happen in 2025.
Just over half of banks and brokers say T+1 has had a significant impact on their firms’ headcount, as new workflows “expose them to high volumes of manual processing and exception handling triggered by their clients,” the report said.
Many firms are relocating staff to better align their working days with core trading processes. Some 38% of respondents said they were relocating staff as a result of the move, most commonly in their FX and finance teams.
The survey, which included approximately 500 market participants, shows that there is a significant difference in the impact of T+1 on financing costs.
The biggest impact for brokers and custodians was a reduction in clearing margin of around 30%. Around 80% of sellers indicated that this development had a major impact on their business.
In contrast, 46% of buy-side respondents indicate that they have to cover significant funding gaps during the settlement process, as they switch between T+1 and T+2 arrangements (the latter still the norm in Europe and the global FX market).
Given the continued mismatches in global markets, attention is now turning to the likelihood that other jurisdictions – including the European Union, the United Kingdom and Australia – will also eventually accelerate their settlement cycles.
“The market appears to be looking at the next wave of expected T+1 transitions in Europe, potentially in 2027, as the trigger for the next round of market moves,” the Citi report said. “Cash, funding and liquidity management remain a major hurdle to both a UK and European transition, with legacy technology a close second.”
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