US Stocks to Witness Déjà vu as Century-Old T+1 Settlement is Reimplemented

The US stock market observed the Memorial Day holiday on Monday. US stocks will resume normal trading sessions on Tuesday, however, what is special about Tuesday is that the US stock market will experience a familiar situation due to the reimplementation of a rule from 100 years ago.

Switch to T+1

That was the last timeshare trades in New York settled in a single day, as they will again starting Tuesday under new SEC rules. This change, which halves the time it takes to complete transactions, also took effect in Canada and Mexico on Monday.

The Switch to T+1 system, abandoned in the past due to high trading volumes, aims to reduce financial system risk. However, there are concerns about potential issues, such as international investors struggling to get funds on time, global funds moving at different speeds to their assets, and everyone will have less time to fix errors.

Securities Industry and Financial Markets Association Prevention Measure

The hope is that everything will go smoothly, but even the SEC mentioned last week that transition might cause a “short-term increase in settlement failures and challenges for a small segment of market participants.” To address this, the main finance industry group, the Securities Industry, and Financial Markets Association has set up the T+1 Command Center to identify and manage any problems.

This isn’t the first time Wall Street has faced such a transition, but experts say this one will be the most challenging. In the 1920s, during the “roaring ‘20s” known for incredible stock market performance, the T+1 era ended because manual transactions couldn’t keep up with the high trading volume. Eventually, the settlement time was extended to as much as five days.

India’s Settlement Cycle

In India, exchanges followed a T+2 settlement cycle, meaning trades would be settled in two business days after execution. In January 2024, it was shortened to T+1 in a phased manner starting January 2022. The domestic market has now moved to the same-day settlement of trades i.e. T+0 in March 2024.

It will be interesting to see how the US market handles the transition to the T+1 settlement cycle.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.