Wall Street looks to shift securities settlement cycle to T+1

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• The securities settlement process is set to get even faster after the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA) and the Depository Trust & Clearing Corporation (DTCC) laid out a new goal of getting the industry to "T+1." Currently, market players are required to physically deposit stock in an account within two days of making a transaction in a process known as "T+2." During that time, brokers have to post collateral to the DTCC because equity prices can fluctuate over those 48 hours and some buyers/sellers are using margin/borrowed shares, so the lag can make sure everything turns out all right.
• Backdrop: For many years, markets operated on a "T+5" settlement cycle, when security transactions were done manually. In the 1990s, the SEC shortened the settlement cycle to three business days, which reduced the amount of money that needs to be collected at any given time. It was only in 2017 that the commission moved to T+2, calling the previous standard an outdated "settlement cycle" due to improvements in technology, emerging new products and growing trading volumes.
• "Shifting to T+1 will strengthen the financial system and offers tangible benefits to investors by reducing their risk exposure and enabling them to more quickly leverage investment opportunities," said ICI President Eric Pan. The extensive overhaul would cover settlement infrastructure, changes to business models and system requirements and improvements. Implementing T+1 in the first half of 2024 will "allow enough time for firms to assess the changes they need to undertake, for the industry to conduct comprehensive testing, and for regulators to make the necessary regulatory changes."
• Outlook: Some have even called for real-time settlement, like Robinhood (NASDAQ:HOOD) CEO Vlad Tenev, whose firm had to restrict trading earlier this year during the notable short squeeze of GameStop. However, that's unlikely to happen anytime soon, as it would require expensive updates to almost all market infrastructure, hamper margin purchases of stock and erase most of the benefits of netting, which provide liquidity and minimize risk. Instead, the next realistic target would likely be T+0.5, where trades are settled same day.
• Related brokers: Robinhood (HOOD), TD Ameritrade (NYSE:SCHW), Interactive Brokers (NASDAQ:IBKR), Charles Schwab (SCHW), E-Trade (NYSE:MS) and Cash App (NYSE:SQ).