The transition of US stock markets to T+1 settlement – where securities trades settle one business day after execution rather than two – was hailed as a move that would reduce systemic risk and provide quicker access to investor funds. But for corporate treasuries, the impacts of T+1 go far beyond one less day of settlement time.
On the surface, T+1 settlement promises substantial benefits. With trades settling 24 hours earlier, treasury teams gain faster access to proceeds from securities sales, enabling quicker redeployment of cash into new investments or operational needs. Shareholder confidence may also rise with reduced counterparty risks in the financial system.
However, the accelerated settlement cycle creates an array of operational challenges and resource strains for corporate treasuries struggling to adapt. The most significant pitfalls include:
Liquidity Management Disruptions
The accelerated T+1 settlement cycle leaves little flexibility for corporate treasuries to manage cash around settlement obligations. In the past, treasurers had an extra buffer day under T+2 to arrange financing for purchase obligations or shift funds between accounts to cover any shortfalls. Now with T+1, the urgency to have cash ready for settlement is heightened.
Treasurers will need to carefully forecast upcoming cash flows from sales and redemptions of marketable securities to avoid scramble situations. For large corporations, cross-border movement of funds from foreign subsidiaries to correspond with T+1 settlement in the US adds another dimension of complexity. Even the most sophisticated treasury management systems can fail to predict sudden market shocks or trading partner fails that drain cash balances prematurely.
Ultimately corporate treasuries must walk a tightrope between limiting idle cash balances that impact working capital efficiency and ensuring adequate liquidity to fund settlement obligations despite volatility. This constant balancing act will become more precarious and prone to risks under T+1.
Technology and Staffing Pressures
Adapting existing treasury technology infrastructure and staffing models to seamlessly support accelerated T+1 settlement timeframes poses a tall order for corporate treasuries.
Many will need to invest substantial budget in upgrading treasury management systems to compress reporting cycles, speed up transaction processing, and enable real-time cash positioning visibility across accounts.
Adding features to proactively identify liquidity risks or provide automated alarms around potential settlement shortfalls will also become a priority.
Expanded headcounts or overtime among treasury operations teams will likely be needed to manage elevated transaction flows under condensed processing windows while also implementing technology upgrades.
Staff must support faster intraday decision-making regarding cash mobilization between subsidiaries to avoid settlement failures. But budget constraints may limit many treasury departments from adding full-time roles or expanding systems capabilities to the extent needed, setting up risks of bottlenecks or burnout.
Working Capital Inefficiencies
To ensure cash is on hand to fund T+1 settlements, corporate treasuries will feel pressure to park excess liquidity in very short-term, lower-yield money market holdings or cash equivalents rather than stretch for extra investment income.
While this cash drag may seem negligible on the surface, sustained periods of suboptimal yields across vast corporate cash balances will present lost opportunity costs.
Also, the rising costs of financing short-term cash flow gaps due to unexpected market changes or counterparty fails may counterbalance savings from a single-day accelerated settlement in some cases.
Is it all worth it?
In today’s rising interest rate environment, these liquidity, technology, and staffing pressures threaten to overwhelm slim-budgeted treasury departments.
And the risks will multiply as global markets eventually follow the US shift to T+1, leaving corporate treasuries worldwide struggling to catch up.
So is the move to T+1 truly worthwhile?
Large brokerages who can spread adaptation costs may reap economies of scale. But for corporate treasury teams already understaffed and overloaded, the benefits of speedier settlement hardly justify the headaches.
Faster isn’t necessarily better – but it is the way we are headed.