US reverts to T+1 settlements after a century

New York stock exchange's headquarters

US stock markets resumed today, May 28, settling stock transactions within one day, known as “T+1” system, after 100 years of suspension. This step aims to reduce risks within the financial system of the world’s largest economies.

The “T+1” settlement system means that the settlement of stock sale transactions will take place the day after the transaction is executed, instead of taking two days to transfer the securities to the buyer’s account and the funds to the seller’s account, as was the case in the system that has been in place since 2017.

The new settlement rule from the US Securities and Exchange Commission (SEC) also aims to reduce the transaction execution time by half.

Meanwhile, a number of markets, including Canada and Mexico, took a similar step on May 27.

The SEC stated, in a statement last week, that this change may result in an increase in settlement failures in the short term, adding that a small segment of market participants will face some challenges.

The T+1 system was discontinued in the 1920s, which was characterized by the boom in the stock market. All transactions were carried out manually, which made it difficult to keep up with the increase in trading activity. The settlement time was then increased to five days.

The time required to conduct settlements was reduced to only three days in 1987 after the “Black Monday” crisis, then to only two days (T+2) in 2017 in order to keep pace with the nature of modern markets.