Wall Street’s T+1 switch is causing more pain than previously thought, Citi says

(Bloomberg) — This year’s seemingly smooth transition to a faster settlement regime for U.S. stocks is proving to be far from straightforward for many industry players, according to Citigroup Inc.

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From overhauling arcane funding processes to relocating traders overseas, the switch at the end of May to the system known as T+1 proved tougher than expected, the bank found in a survey of market participants.

The scale of the required changes – which affected several divisions, including financing, foreign exchange lending and securities – caught many in the industry off guard, the survey found. Meanwhile, the impacts of the change appear to have been felt unevenly, with asset managers hit by higher funding costs as banks and other intermediaries see spending fall.

“Every area appears to have been more affected than originally anticipated, from funding to headcount, securities lending and default rates,” the Wall Street bank’s securities services arm said in a report Wednesday. . “Investment budgets have been diverted, non-critical projects have been delayed and critical resources have been borrowed.”

The T+1 change was a global event for the financial industry as it affected every institution and investor with cash in the US capital markets. The change introduced a number of challenges, including significantly reducing the time available to complete important steps in the business process.

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Extensive preparations have helped ensure a seemingly smooth transition, but the Citi survey indicates the work is far from done. The bank found that 33% of projects related to the T+1 shift – mainly in the form of additional automation as well as additional hiring – are to be realized and are likely to occur in 2025.

Just over half of banks and brokers say T+1 had a significant impact on headcount at their firms. That’s because the new workflows leave them “exposed to high volumes of manual processing and handling of exceptions raised by their customers,” the report said.

Many are moving staff to better align their workdays with key business processes, with around 38% of respondents saying they are moving staff as a result of the change, typically in their FX and finance teams.

The survey, which surveyed approximately 500 market participants, notes a wide discrepancy when it comes to the impact of T+1 on funding costs.

The biggest impact for brokers and custodians was a reduction of around 30% in the compensation margin, with around 80% of the sell side seeing the development as having a strong impact on their business.

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In contrast, 46% of buyside respondents say they have to cover significant funding shortfalls during the settlement process, while navigating between T+1 and T+2 regimes (the latter is still standard in Europe and the global FX market ).

Given the continued mismatches in global markets, attention is now turning to the likelihood that other jurisdictions – including the European Union, the United Kingdom and Australia – will eventually accelerate their settlement cycles.

“The market appears to see the next wave of expected T+1 transitions in Europe, potentially in 2027, as the trigger for the next round of market moves,” the Citi report said. “Cash, funding and liquidity management remain the top hurdle for both a UK and European transition, with legacy technology a close second.”

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