Discussions on introducing a T+1 system to shorten the domestic stock market's settlement cycle by one day are gaining momentum. The aim is to shorten the structure in which settlement is completed two days after the transaction date by one day to speed up the turnover of investment funds and improve market efficiency. However, there is also an assessment that there are many challenges to resolve, including foreign exchange market infrastructure, responses to foreign investors, and system overhauls in the financial sector.
According to the financial investment industry on the 18th, related institutions including the Korea Exchange (KRX) and the Korea Securities Depository (KSD) plan to hold a forum this month on shortening the settlement cycle and gather opinions from the industry, experts, and individual investors.
Currently, domestic stock transactions use a T+2 method in which settlement is completed two days after a trade is executed. The exchange and the depository manage the risk of settlement failure in the middle. Investors have complained that they cannot immediately use sale proceeds until settlement. In contrast, if the system shifts to T+1, there are expectations that faster recovery of sale proceeds and earlier reinvestment could improve the overall flow of funds in the market.
Talk of shortening the settlement cycle picked up speed after President Lee Jae-myung noted the need at a Blue House capital market roundtable in Mar. At the time, Lee said, "There are comments asking why money from a stock sold today is paid the day after tomorrow," and noted that it is necessary to review the possibility of improving the system.
Related institutions have also begun reviewing overseas cases. A working group consisting of the exchange, the depository, and the Korea Financial Investment Association visited the United States and Europe from the 17th of last month to the 1st of this month to examine local operations. The United States has already implemented T+1 settlement since May 2024, and the United Kingdom and the European Union (EU) are also pushing for introduction in Oct. next year. There are projections that discussions in Korea are likely to target a similar timeline.
However, there are many hurdles to clear before actual implementation. The biggest variables are foreign investors and foreign exchange market infrastructure. If the settlement cycle is shortened by one day, overseas investors may effectively need to prepare for settlement from the early morning of the transaction day due to time differences.
Although the domestic foreign exchange market will expand to a 24-hour operation system starting in Jul., the offshore won settlement system is targeted for establishment in 2027. Given the high share of foreign investors in Korea's stock market, there are also concerns that if the won conversion and settlement systems are not adequately prepared, overseas capital could flow out. In fact, among Asian markets, only Hong Kong has formalized plans to adopt T+1 at this time.
The burden of overhauling systems in the securities industry is also heavy. Not only the exchange and the depository but also brokerages, asset managers, and banks must revamp settlement processes and IT systems across the board. If settlement times are moved up, nighttime work in the financial sector is likely to increase, making consultation with labor unions necessary.