The rush to settle: inside the real cost of going T+1

DEEP LOOK | If you thought all the work required to cope with faster settlement in North America had been done by May 2024, think again. In the first part of a two-part series on T+1 costs, PostTrade 360° takes a closer look at how faster settlement has impacted (and continues to impact) post-trade costs in North America and the impact on operations.

Click here for part two of this article duo

The effect on back office costs for US and Canadian securities firms has been one of the most eagerly anticipated metrics of T+1, with some observers suggesting a bump of close to one-fifth in staffing costs alone as the price paid for a transition that was achieved with relatively little disruption.

Firms that didn’t scale up their workforce to manually handle the increased time pressure faced the prospect of more trade and settlement fails, both of which carry financial penalties.

Manual workarounds drive temporary headcount increases

There is anecdotal evidence to suggest that some firms increased their US assessment team headcount by up to 10% and are now trying to work out how to bring that number down, not to mention reducing the number of project leaders hired to manage the delivery phase.

Daniel Carpenter, CEO of Meritsoft goes further, suggesting that additional staffing costs may have been as high as 18% in some cases and notes that while affirmation rates may have improved, fail rates as a percentage of all settlements have not really shifted and that relying on manual processes and human intervention to fix this is strategically unsustainable.

Hope for cost reductions through delayed tech projects

The financial impact was felt most acutely by large global custodians that had to stand up bigger teams. However, Mack Gill, head of securities processing at FIS (who will be discussing some of the actions taken in a PostTrade360 2025 session on 3 September) says these costs are expected to come down as delayed technology modernisation and automation projects are delivered.

An industry poll conducted as part of a Citi Securities Services September 2024 whitepaper indicated that almost a quarter of project activity for North America’s transition to T+1 was scheduled to be undertaken in 2025 or later as firms undertake complex and fundamental changes they preferred to avoid during a major transition year.

A further complication is that some liquidity management solutions are not applicable to all investments or eligible securities strategies, such as borrowing, futures, repo/reverse repo or use of the override provision permitted by the SEC, which allows for non-T+1 settlement where both parties agree at the time of the transaction.

This session at PostTrade360 2025 is just one of many that will shed more light on upcoming market and regulatory changes.

Affirmation and fail rates hold steady

Reported trade failure rates did not spike post US T+1 – which was a primary concern prior to implementation – with the percentage remaining under 2% (1.90% to be exact) on the first day of the newly accelerated cycle.

According to Adrian Whelan, managing director and global head of market intelligence for investor services at Brown Brothers Harriman, this discipline has largely persisted. 

DTCC’s reported data indicates that same day affirmation rates have also been a success, staying well above the prescribed 90% threshold. This is a strong indicator of the increased operational efficiency and automation spurred by T+1.

“There is no penalty regime for late settlement in the US the way there is in Europe under the CSDR regime so it is very hard to put a hard and fast monetary figure on financial impact,” suggests Whelan. “While I have seen dollar cost numbers reported, they run a wide spectrum because it is really a classic case of cost depending on so many variables.”

Northern Trust’s experience is that the investors and managers it works with have sought increased access to liquidity post US T+1 in the form of higher overdrafts or other forms of liquidity extension. “When coupled with the global interest rate environment, the costs of settling trades are at least a little higher than before the change and that is most visible where there is manual processing,” says Gerard Walsh, global head of client solutions, banking and markets. “It is clear that manual processing in a shortened settlement cycle environment creates pressure points, especially in the trade and trade-related FX lifecycles.”

Netting and margin benefits offer some relief

On the upside, most firms expected a reduction in the amount of margin they have to post because they are posting it for one less day, which could be considerable given the number of the trades involved.

In addition, firms in the US will also have benefitted from CNS, the NSCC’s core netting engine. This enables trades to be netted out if they are affirmed on the night of ‘T’ – which has historically created 90%+ netting efficiency. In Europe, however, multiple currencies and CSDs with different cut-off times (and the need for cross-border settlements between the different CSDs) are a consideration.

“That means it is incredibly important to have much closer coordination between market participants and market infrastructures, in order to get close to the success rate in the US,” explains James Pike, chief revenue officer Taskize. “Then you have to consider that fail rates in the US market are about half of one percent versus 4-7% in Europe.”

There was a lot of focus in the years leading up to T+1 in North America on addressing manual processes at the industry level as well as looking at location and operating models (whether buy-side, sell-side or custodian) to implement the appropriate infrastructure.

Automation and match-to-instruct tools on the rise

Many smaller firms were at a disadvantage as they did not have multiple locations and were reliant on one team undertaking functions as well as maintaining a manual footprint, explains Michele Pitts, global product head of transaction management at Citi Investor Services.

“We saw a great reduction in manual processes overall and more reliance on services like DTCC’s Match-to-Instruct workflow or custodians’ execution to custody models to remove elements from a client’s operating model that would require firms to do a manual activity,” she says. “These were replaced with solutions that other providers had already implemented to automate processes.”

Data from DTCC also shows that margin requirements in the US have fallen under T+1. “More importantly, the counterparty risk that may result from a longer settlement cycle is being reduced,” adds Pitts.

Large-scale custodians looked at the US move to T+1 as the first of many such transitions, focusing on the removal of inefficient processes and procedures and other obstacles that would prohibit straight-through processing.

Fail costs can cascade rapidly

A less widely discussed cost factor is who foots the bill in situations where T+1 settlement is not possible.

“When T+1 settlement fails, the liability structure follows a clear but costly cascade,” says Duncan Carpenter, director of product at Pirum. “The party causing the failure bears primary responsibility, including penalties, buy-in costs and compensation payments. However, the compressed timeframe amplifies these costs and associated risks significantly.”

In the US, while there are no direct regulatory penalties as there are under Europe’s CSDR regime, the consequences can still be severe. Buy-in procedures remain unchanged but now must be executed within less than 24 hours compared to 48 hours under T+2. This time compression can amplify buy-in costs due to adverse price movements during the shortened remediation window.

Accountability pressures and market reputation

“The liability flows through the settlement chain from the failing party to custodians and broker-dealers, who may face operational costs and client compensation requirements, ultimately impacting end clients through fees, performance and reputational damage,” says Pirum’s director of product.

Settlement fails – the main cause of which are shorts on stock positions – often kick off stock borrowing and lending activities, which then incur substantial costs and can include interest claims from trade counterparties.

Data and cost attribution as risk tools

Meritsoft’s Carpenter warns that if a firm is unable to settle on time, it will quickly find itself cut out as counterparties look to others who can.

“Rapid issue resolution and fault attribution are key elements of the process to minimise these additional costs, with the data then providing the ability to benchmark counterparty performance against markets and peers, which will become a key decision-making tool,” he says. “Firms who are proactive will quickly be able to identify the weakest links to minimise fails and the associated costs.”

Market consolidation likely on the horizon

Walsh observes that in his experience, every actor in the lifecycle of the investment decision is accounting for costs and, if not fully passing them back to the order originator, at least partially doing so.

“That applies to clearing agents, brokers, FX trading houses and all others in the lifecycle,” he adds. “It is important to remember that the level of cost transparency in the UK and Europe is very high in the equity and equity trade-related FX universe and therefore the ability to attribute costs appropriately is also high.”

The factors outlined above have the potential to fuel market consolidation as smaller firms pool their resources to meet the investment demands of a shorter settlement cycle.

“Cooperation among global/regional players around shared technology platforms is increasingly finding its way onto the agenda, not least to spread out investment costs going forward,” says Julia Romhanyi, global head of securities services at UniCredit. “What will be the real trigger for consolidation among mid-size and smaller players is difficult to say but the pressure to comply with changes (regulatory or infrastructure-related) without economies of scale will push smaller players to think over their strategies.”

Looking ahead: from T+1 to T+0

Anoosh Arevshatian, chief product officer at Zodia Custody predicts market consolidation and investment into market infrastructure and tooling. “As automation becomes more prevalent over the short term, investments into blockchain technology (either permissioned or permissionless) will become the norm over the next 3-5 years, supporting the inevitable eventual move towards T+0 over the next decade.”

Interested in finding out more about the main issues to analyse before national markets take further steps towards some form of T+0 settlement? Then check out this session.

In the second part of this series we will consider the technology investment implications of T+1 for European firms and how faster settlement will affect margin volumes.