Korea Exchange (KRX) and Korea Securities Depository (KSD) will unveil a roadmap as early as October to shorten the stock settlement cycle to "T+1 day." Because stock sale proceeds can be retrieved faster, retail investors are expected to respond positively, and the push is gaining momentum in step with government and political efforts to revitalize the stock market.
However, some note the issue is not as simple as it seems. First, there are concerns that the settlement fail rate—which is almost nonexistent in the domestic market now—could rise. In addition, for retail investors who buy stocks on credit through unfunded trades, the margin had to be topped up within two trading days, but going forward they will likely have to pay the amount within one day.
According to the financial investment industry on the 5th, domestic stock transactions currently use a "T+2" method in which settlement is completed two days after a trade is executed. For example, if you sell a stock on Monday, you can receive the sale proceeds and withdraw them on Wednesday, two trading days later. If the system shifts to T+1, there are expectations that faster retrieval and reinvestment of stock sale proceeds will improve market liquidity flows.
On the other hand, many argue that introducing a T+1 system will inevitably raise settlement fail rates. At a deep-dive forum on shortening the settlement cycle hosted by the Korea Financial Investment Association on the 2nd, a key point was that Korea, which is currently on T+2, sees almost no settlement fails.
By contrast, in the United States, which adopted T+1 in 2024, settlement failures had already been frequent, and after adoption, fails were analyzed to occur in about 2%–3% of all transactions.
A settlement fail refers to a situation in which, after a financial product trade is executed, the buyer fails to pay the purchase amount or the seller fails to deliver the securities by the agreed settlement date. When the settlement cycle is shortened, processes that previously unfolded over two trading days must be completed in a much shorter time, structurally increasing the likelihood of system-related settlement failures.
Kang So-hyun, a research fellow at the Capital Market Research Institute, said, "Because settlement fails hardly occur in Korea now, if one happens, there could be a perception that the securities firm is at fault," adding, "In the United States, 2%–3% of settlements fail, but this is not so much because an individual financial company is unsound as it is something that can occur in the course of very normal market operations."
Kang added, "Korea has so far focused on making settlement fails zero and has become quite accustomed to that, but if the settlement cycle is shortened, the likelihood of failure rises," noting, "What matters is not to make failures never occur, but to approach the issue in terms of identifying causes and expense."
In addition, individual investors who engage in unfunded trades also need to pay attention to the settlement cycle. An unfunded trade means buying stocks on credit by providing only a certain ratio of collateral in cash. Under the current T+2 settlement cycle, this credit balance only needs to be paid by the settlement date two days later. If the investor fails to pay, the securities firm that lent the money will execute a forced sell-off the day after settlement.
However, if the settlement cycle is shortened to T+1, the deadline to repay the credit balance is reduced to within one trading day. As a result, the grace period to realize a profit by selling after buying a stock becomes shorter.
A securities industry official said, "If the settlement cycle shortens, the number of unfunded trade users will inevitably decline, and the expected profitability using leverage could also decrease."