Citi Research: US stocks shifting to T+1 settlement is more challenging than expected

According to the financial news app Zhitong Finance, Citigroup stated on Wednesday that this year, the U.S. stock market seems to have smoothly transitioned to a faster settlement mechanism, but for many industry participants, it has not been smooth sailing. Citigroup's survey of market participants found that the transition to the T+1 system at the end of May, from completely reforming the opaque and complex financing process to cross-border reassignment of traders, has proven to be more challenging than expected.

The survey shows that the scale of the necessary changes - affecting departments such as financing, foreign exchange, and securities lending - has caught many industry participants off guard. At the same time, the impact of this transition seems to be uneven, with asset management companies facing the impact of rising financing costs, while banks and other intermediaries are experiencing reduced expenses.

In a report released by Citigroup's securities services department on Wednesday, it stated: "From funds, number of employees to securities lending and failure rates, every area seems to have been impacted more than initially expected." "Investment budgets have been diverted, non-critical projects have been postponed, and important resources have been borrowed."

For the financial industry, the transition to the T+1 system is a global event as it affects all institutions and investors holding cash in the U.S. capital markets. This change has brought a series of challenges, including significantly shortening the time required to complete important steps in the transaction process.

Extensive preparation ensured a seemingly smooth transition, but Citigroup's survey shows that the work is not yet complete. The bank found that 33% of projects related to the T+1 transition have not been carried out, mainly further automation and additional hiring, which are likely to be implemented by 2025.

More than half of banks and brokers stated that T+1 has had a significant impact on the number of employees in their companies. The report stated that this is because the new workflows have led them to "face a large amount of manually triggered and exception handling by customers."

Many companies are rearranging their employees to better align their work hours with critical transaction processes, with about 38% of respondents stating that they are mobilizing employees, usually from the foreign exchange and financing teams, due to this transition.

This survey of about 500 market participants shows significant differences in people's views on the impact of T+1 on financing costs.

For brokers and custodians, the biggest impact is a reduction of about 30% in clearing margins, with about 80% of sellers stating that this change has had a strong impact on their business.

In contrast, 46% of buyer respondents stated that when transitioning between the T+1 and T+2 systems (the latter still being the standard in European and global currency markets), they had to fill a significant funding gap during the settlement process.

Given the ongoing misalignments in global markets, attention is now turning to the possibility of accelerating settlement cycles in other jurisdictions (including the EU, UK, and Australia).

Citigroup's report stated: "The market seems to view the next wave of T+1 transformation in Europe (possibly in 2027) as the catalyst for the next round of volatility." "Cash, financing, and liquidity management remain the biggest obstacles to the UK and European transformation, with traditional technology coming in second."