Government drafts roadmap as industry consultation begins next week
Consultancy tasked with building 'T+1 standard operating model'
FX settlement gap, Asia-Pacific timing among key hurdles
The government has drafted a roadmap to shorten the stock settlement cycle from the current two trading days (T+2) to one (T+1), and will begin gathering market feedback next week.
The shift goes well beyond moving a calendar deadline by a single day — it would ripple across trading hours, clearing and settlement, foreign exchange and custody functions throughout the capital markets. Handled poorly, the transition could trigger foreign capital outflows or a sharp rise in transaction costs, particularly if South Korea falls out of step with major global markets. Analysts say a precise strategy is essential.
Korea Exchange and the Korea Securities Depository will begin broad consultations with domestic and foreign investors and other market participants next week, according to the financial investment industry.
The move follows Thursday's expanded macroeconomic and financial meeting — known as the F4 — chaired by Deputy Prime Minister and Ministry of Economy and Finance Minister Lee Hyong-il, which was also attended by the Bank of Korea governor, the Financial Services Commission chairman and the Financial Supervisory Service director general. The meeting discussed a draft roadmap for the T+1 transition.
Debate over shortening the settlement cycle has continued steadily since it was first raised in 2023, when the Korea Capital Market Institute conducted a feasibility study on the matter. In September last year, Korea Exchange launched a joint T+1 working group with related institutions and industry participants.
Korea Exchange conducted on-site research visits to key institutions in the United States, the United Kingdom and the EU in late April this year, and in May the exchange, the Korea Securities Depository and the Korea Securities Association jointly held the first public forum on the issue. A consulting engagement began in July, and the Korea Financial Investment Association hosted an in-depth symposium on settlement cycle reform in September.
The draft roadmap is expected to take more concrete shape once results emerge from a consulting project currently being carried out by Deloitte Anjin LLC, jointly commissioned by Korea Exchange and the Korea Securities Depository, on shortening the securities market settlement cycle.
The core objectives of the engagement are to build a "T+1 standard operating model" covering the entire clearing and settlement process and to develop ready-to-use operational standards broken down by sector, timing and function. Final results are not yet in, but the study is examining settlement trends in North America, Europe and Asia alongside the cash-management efficiency gains from earlier receipt of settlement proceeds, and the cost implications for global funds holding Korean equities under a mismatched settlement regime.
Shortening the settlement cycle is fast becoming a global standard. The United States moved most securities transactions from T+2 to T+1 on May 28, 2024. Canada, Mexico and Argentina — where many securities are dual-listed with US markets — acted one day earlier, on May 27, 2024, to pre-empt system errors and arbitrage risk from settlement-date mismatches.
In Europe, the United Kingdom and the EU are coordinating a transition targeting implementation in October next year. In Asia, Hong Kong announced in April that it plans to make the switch within the fourth quarter of next year. Japan and Australia, by contrast, are holding back, citing the need to replace aging settlement infrastructure and assess broader market impact, and have yet to set specific transition timelines.
South Korea is also wrestling with the timing. Moving too quickly — without aligning with neighboring markets or ensuring that foreign exchange and custody infrastructure is ready — risks raising costs for global funds investing in Korean equities. But falling behind after major markets have already switched carries the same risk.
Deputy Prime Minister Lee underscored both the opportunity and the complexity at Thursday's F4 meeting. "Shortening the settlement cycle is an important task that can reduce settlement-related risk and improve the efficiency of capital use," Lee said, adding that "for a stable transition, we must fully consider the readiness of the financial investment industry and domestic and foreign investors, settlement and foreign exchange liquidity, system stability, and the progress of major Asian countries in shortening their own cycles."
A Korea Capital Market Institute report on the post-implementation assessment of the US T+1 transition and major-country responses found that when the US moved from T+2 to T+1 in May 2024, it did not simply shorten the settlement date — it also mandated same-day completion of post-trade processing (allocation, confirmation and affirmation) and introduced straight-through processing automation, amounting to a structural overhaul of the market.
The results have been broadly positive for US market efficiency and stability. As settlement accelerated, the National Securities Clearing Corporation's clearing fund fell by roughly 23 percent — from a three-month average of $12.8 billion before the transition to a two-month average of $9.8 billion afterward.
For overseas investors in different time zones, however, the shift imposed new costs and operational burdens. Because global foreign exchange markets still settle on a T+2 basis, foreign investors must either pre-fund dollar positions or draw on credit lines to meet the tighter US equity settlement deadline. In addition, US-listed ETFs subject to T+1 face funding mismatches when they hold assets from T+2 settlement countries.
Han A-reum, a senior researcher at the Korea Capital Market Institute, said South Korea should draw on the US experience to raise the level of back-office automation by standardizing messaging and adjusting cut-off times among domestic asset managers, brokerages and custodians. "Given the high degree of openness of the domestic market, the time gap between foreign exchange and securities settlement should be treated as a separate policy priority, and measures to improve foreign exchange convenience should be examined in parallel," Han said.
Looking further ahead, the settlement cycle debate is expected to evolve toward blockchain-based real-time settlement, or T+0. India is already running an optional T+0 system alongside T+1, and the current consulting project for Korea Exchange and the Korea Securities Depository includes research into blockchain-based clearing and settlement and T+0 initiatives being pursued by the New York Stock Exchange and NASDAQ. NASDAQ has already completed rule changes this year to allow listed shares and exchange-traded products to be traded in tokenized form, while the NYSE is working to build a dedicated tokenized securities platform supporting 24-hour trading and instant settlement for listed shares and ETFs.
jiyun@heraldcorp.com
