Risk Committee Update June 2024

Latin America 

The alignment of Latin America (LATAM) with the United States' (US) transition to a T+1 settlement cycle holds substantial implications for financial institutions across the region, particularly given the intertwined nature of LATAM equity markets with those in the US. Argentina, Canada and Mexico transitioned to T+1 on 27 May 2024, one day ahead of the US, signifying an important moment for LATAM's financial infrastructure. 

LATAM markets transitioned to T+1 on 27 May 2024

Mexico 

Mexico transitioned to T+1 settlement on 27 May 2024. This decision aligned Mexico with US market practices and aimed to enhance operational efficiency in its capital markets. Mexico's alignment with US market practices is a crucial driving force behind this transition. Approximately 50% of the trading volume on the Mexican exchange is related to foreign securities, with around 70% of domestic Mexican stock trading volume generated by foreign investors. Given this significant dependency on the US market, synchronising settlement cycles is a necessity. On 29 May, the day after the first T+1 settlement, the Mexican Securities Central Counterparty (Contraparte Central de Valores de México [CCV]) announced a six-month reduction of the level of penalties imposed by CCV on failing transactions in the domestic securities market as well as those dual-listed US/Canadian securities trade in the International Quotation System. This has been done to ease the liquidity pressures on margin models triggered by an expected increase in failing transactions as the market adapts to the new cycle.

Argentina 

Argentina’s transition to a T+1 settlement cycle for regular spot transactions in equities and bonds on 27 May 2024 was primarily motivated by the country's strong ties with the US market. However, it's important to note that the Argentine Open Electronic Market (MAE) will maintain a T+2 settlement cycle for spot-fixed income transactions.

Jamaica 

Jamaica's move to T+1 was due to Jamaica's interest in aligning with international standards and providing additional benefits to investors.

LATAM markets exploring T+1 adoption in the next few years

Nuam (Chile, Colombia, and Peru integration)

Nuam, representing Chile, Colombia, and Peru, has announced plans to migrate to a T+1 settlement cycle for equity transactions across all three markets (after the integration of the markets is completed). The transition, scheduled for the second quarter of 2025, underscores a concerted effort towards regional integration and operational streamlining. During the transition period, adjustments will be made to facilitate a smooth migration, emphasising collaboration with market participants and regulatory bodies. However, Peru decided to move the settlement cycle for dual-listed securities traded in the foreign securities market segment RV3 from T+2 to T+1 on 28 May 2024, to coincide with the US market, to avoid mismatches in the settlement of foreign securities between the Lima Stock Exchange and the North American market.

Brazil 

Brazil is actively exploring the feasibility of transitioning to T+1 settlement. However, the country faces challenges such as restrictions on pre-matching and concerns over FX management. These factors still necessitate thorough deliberation to ensure a seamless transition without disrupting market operations.

Panama

Panama is currently exploring the feasibility of transitioning to T+1. The country is in the initial stages of assessing how such a shift might affect its market participants and infrastructure.

Bermuda 

Bermuda will observe the results of the change in US and Canada before deciding on the matter, although it would be expected that they will move to T+1 in order to harmonise processes with their neighbours.

LATAM markets that have already reduced their settlement cycles

Costa Rica

Costa Rica successfully completed its migration to T+1 in January 2024. The transition was smooth, with no significant issues reported post-implementation.

Trinidad and Tobago

Trinidad and Tobago Securities Exchange has already reduced its settlement cycle from T+3 to T+2 for equity and mutual fund securities. This adjustment has been implemented since 18 December 2023

LATAM markets with no imminent changes

Markets such as El Salvador, Bolivia and Uruguay already have T+1 among the options for securities settlement.
On the other hand, some LATAM markets, including the Dominican Republic, Eastern Caribbean nations, Ecuador, and Venezuela, currently do not foresee imminent changes to their settlement and clearing cycles. Factors such as market size and limited dependence on the US market contribute to this position. 

Africa and the Middle East

The alignment of African and Middle Eastern financial markets with global trends in settlement cycles presents unique challenges and opportunities for the regions, and it is important to understand the current settlement practices and future plans of markets in Africa and the Middle East.

Africa

Most African markets have not publicly stated that they are considering shortening their settlement cycles soon. It is likely that these markets are simply not ready for such a change, as they are prioritising other initiatives. However, there are a few exceptions:

Nigeria has plans to move to a T+1 settlement cycle, though no formal timeline is yet established. Informally, initial plans to make a fast move to T+1 have been resisted by market stakeholders due to the significant operational and technological challenges.

Zimbabwe announced a transition to T+2 settlement starting from 1 July 2024.

WAEMU initially planned to shorten its cycle to T+2 in 2022, but the implementation has been delayed without updates.

It's important to note that most African markets currently operate under a T+3 settlement cycle, with Zambia being an exception (it uses T+2). Despite this, the region faces various internal challenges, such as FX liquidity issues in Nigeria and currency problems in Zimbabwe, which hinder the transition to shorter cycles. 

Consequently, there's a prevailing consensus across the region indicating a lack of demand from market participants to shorten the settlement cycle, suggesting that the capital markets are not yet prepared for such a change. However, as is often observed in Africa, a significant move by one country can prompt others to follow suit. With Zimbabwe and Nigeria leading the charge towards a shorter settlement cycle, it's plausible that other markets in the region could follow their lead.

Middle East

In the Middle East, most markets follow a T+2 settlement cycle, with some exceptions and flexible practices.

Israel operates on a T+1 settlement cycle for equities and both corporate and government bonds. 

Saudi Arabia While the default settlement cycle for all on-exchange trades in securities at the Saudi Exchange is T+2, negotiated deals can be settled from T+0 to T+5.

Egypt Government debt settling at the ECSD in Egypt can settle from T+0 to T+5. 

Middle Eastern markets that have already reduced their settlement cycles

Tunisia moved its settlement cycle from T+3 to T+2 in October 2023.

Qatar moved its settlement cycle from T+3 to T+2 in March 2024.

Middle Eastern markets with no imminent changes

The markets currently operating on a T+3 settlement cycle (such as Kuwait, Lebanon, Morocco, and Oman) are considering shortening it to T+2. During the Arab Federation of Capital Markets Annual Conference in Qatar in April 2024, a panel discussion addressed the topic of shortening settlement cycles, with the suggestion that T+1 may be implemented within the next five to six years. 

However, the region is closely observing other markets transitioning to T+1 and has established working groups to discuss its potential implementation. Some markets already offer negotiated settlement cycles, making the shift to a T+1 settlement cycle feasible through incremental changes rather than a sudden overhaul.

Overcoming teething problems

The transition to a T+1 settlement cycle represents a crucial milestone in the evolution of global financial markets, although the pace of its implementation varies significantly by region. 

In Africa, markets still prioritise addressing internal challenges and show slower progress, with notable exceptions like Nigeria and Zimbabwe. 

Latin America, driven by its proximity and trade relations with the US, is making more rapid advancements, particularly in Argentina, Jamaica and Mexico. 

Meanwhile, the Middle Eastern markets, despite facing unique challenges such as geopolitical conflicts, currency fluctuations, high inflation, and regulatory complexities, have made a concerted effort to improve market infrastructure, diversify product offerings, and attract investors from both the region and Asia. 

In this sense, adopting T+1 aims to improve efficiency and investor confidence, but requires overcoming significant technical and regulatory hurdles, adapting infrastructures, and strengthening cooperation among market participants and regulatory authorities. The early experience of the US, Canada and Mexico suggests some technical teething problems have to be overcome, but it is hoped these will be resolved as the markets adapt.

More on T+1

The impact of T+1 equities settlement cycles

T+1 settlement cycles: Lessons from India and the South Pacific

Slow and steady: The EU and UK approach to T+1 settlement cycles