Atomic Settlement vs T+1 Migration

Good morning. Today, we’re exploring two key trends reshaping trade settlements in global financial markets. With growing pressure to speed up transactions and strengthen risk management, the industry is shifting from T+2 (or longer) settlements to a more efficient T+1 process. At the same time, there’s increasing interest in atomic settlement through distributed ledger technology (DLT).

In this article, we compare these two developments by breaking down the basics, examining the challenges, and considering their impact on global custodians and other market participants. Join us as we take a closer look at how these changes are influencing the future of financial markets.

Every Wednesday, we’ll share an article exploring the rapidly evolving global custody sector. Every Friday, we’ll bring you a curated roundup of the most important news and insights affecting our industry.

T+1 Settlement: The Next Step in Speeding Things Up

Why Move to T+1? 

Today, most equity trades globally settle on a T+2 basis. T+2 means trades complete two business days after the trade date. Regulators, like the U.S. Securities and Exchange Commission (SEC), pushed for a move to T+1 settlement. This happened for the United States, Canada, Mexico and Argentina in 2024. This means trades will settle one business day after they occur. The goal is to cut counterparty risk. A shorter settlement period reduces the risk that one party will miss its obligations. It also lowers the need for large margins or extra capital. Research from the Depository Trust & Clearing Corporation (DTCC) shows that T+1 can cut costs and free up working capital for other uses.

Regulatory Drivers and Market Readiness 

Regulators in many regions are also looking at T+1 to modernize settlement. They want to make post-trade processes more efficient and safer. The U.S. Office of the Comptroller of the Currency (OCC) has issued updates. These updates show that market participants must automate and simplify their operations. This includes improving trade confirmation, allocation, and payment processes. Custodians and broker-dealers, serving global clients, are adjusting their systems. They need to handle more data and meet stricter deadlines. Some areas in Asia-Pacific and Europe will follow this trend, but the timelines differ. It looks like key markets such as the UK and some Asian markets will take until 2027 to make this change.

Practical Hurdles in T+1 

Despite its advantages, T+1 is not easy to put in place. Cross-border trades have different time zones, currencies, and local rules. This can make a one-day settlement cycle harder. Market players must confirm trades quickly. They also need to manage funding for settlement in a short time. Companies need to process corporate actions, like dividend payouts and mergers, quickly. This urgency allows little room for mistakes. Firms must make sure their back-office systems can handle the speed and accuracy demanded by T+1.

Your Breakfast Is Holding You Back

Coffee alone isn’t breakfast.

For lasting energy, peak performance, and real health benefits, your body needs more than just empty calories. That’s where Huel Black Edition steps in. Packed with 40g of protein and 27 essential vitamins, it’s the ultimate high-protein meal, ready in just 30 seconds.

Start fueling your day the right way. Use code BEHUEL15 for 15% off your first order, plus a FREE t-shirt and shaker.

Upgrade Your Breakfast Today

Atomic Settlement: Real-Time Potential

How Atomic Settlement Works 

Where T+1 aims for final settlement within a day, atomic settlement aims for near-instant finality. In this model, the exchange of assets and the corresponding payment happen at the same time. DLT, or blockchain-based technology, often powers this process. Some ideas suggest using central bank digital currencies (CBDCs) to digitize payments completely. Under atomic settlement, no party has to wait for the other side to deliver because both assets and payment transfer in one step.

Benefits of Instant Finality 

Atomic settlement all but removes counterparty risk. Since trades close right away, there is no waiting period during which one side might fail to deliver cash or securities. This approach works well in low-volume, high-value markets. Examples include syndicated loans and private equity. In these areas, delays in settlement can be costly. Atomic settlement can cut down on manual reconciliation work. This reduces errors and lowers operational costs, so there are fewer failed trades.

Barriers to Widespread Adoption

Atomic settlement is appealing, but it faces practical challenges. A major concern is liquidity. If trades settle right away, market participants must have cash or collateral ready at the time of the trade. In large, active markets, keeping enough cash or collateral ready at all times can be expensive. Also, existing DLT platforms must prove they can handle large transaction volumes securely. Regulatory frameworks must change to protect investors. They should provide oversight and clear legal guidelines for real-time settlements.

A Gradual Shift Toward Atomic Settlement

Extended Hours and Optional T+0 

Some markets may not switch to real-time trading all at once. Instead, they might start with extended trading hours or optional T+0 (same-day) settlement for those who prefer it. This lets participants choose same-day finality. This method helps regulators and market players grasp real-time processes. They can do this without making a big overnight change.

Limited DLT Tests

Exchanges and clearinghouses in various regions are running closed pilot programs to test DLT. These small studies usually look at specific cases. They often explore things like intra-day repo or private placements with fewer participants. If these pilots work, they could lead to wider use. The goal is to show that atomic settlement can improve risk control, speed up processing, and ensure reliable compliance on a larger scale.

Coexistence: When T+1 Meets Atomic

Maintaining Multiple Settlement Tracks 

In the future, high-volume markets, especially equities, may settle on T+1 or even T+0 at day’s end. Some specialized or high-value trades might shift toward atomic settlement. Research shows that short settlement windows, like 30 minutes or a few hours, can offer risk benefits. This is especially true when they are combined with netting which reduces the overall liquidity requirement for market participants. This means markets might find a middle ground where most trades follow a quicker cycle, but not necessarily without delay.

Global Custodians’ Changing Role

In a world that may use atomic settlement for some trades, global custodians will remain important. They may also manage digital assets, secure private keys, and oversee smart contracts. They might also help clients move collateral across multiple ledgers or blockchains, serving as a bridge. Even if securities turn into digital tokens, custodians will still play a crucial role. Their key services, like compliance checks, corporate actions, and tax services, will continue to matter.

Getting Ready for the Next Stage

Practical Steps for Firms 

With T+1 coming up in more countries after first going live in 2024 for the USA and several other markets, the industry must invest in technology to improve data flow and speed up processing. Automate trade capture. Improve reconciliation tools. Also, ensure real-time visibility into positions and cash. They also need to monitor DLT developments. Joining consortiums, taking part in sandbox projects, and tracking new regulations will help them understand atomic settlement. Staying informed will guide their decision on offering a real-time settlement option.

Collaborative Efforts 

Many stakeholders—issuers, brokers, custodians, clearinghouses, and regulators—must collaborate to set common standards for messaging and data exchange. These standards should enable smooth communication between different systems, whether they use legacy technology or DLT. Without consistent rules and strong oversight, new settlement methods may encounter delays or create unexpected risks.

Key Takeaways

Moving to T+1 settlement is like upgrading roads for faster travel - it keeps the familiar parts but speeds up the process and cuts risk. Atomic settlement is like building a high-speed rail - it's faster and has no stops, but it requires major changes in infrastructure, tech, and daily operations.

T+1 will likely become the global standard for high-volume markets soon. As the industry adjusts, discussions about T+0 or full real-time settlement will grow. Atomic settlement may first appear in markets where the benefits outweigh the costs. With the rise of DLT and central bank digital currencies, real-time settlement could become possible in more areas over time.

Global custodians need to prepare for both options. They must upgrade their back-office systems for T+1 and monitor research and pilots in atomic settlement. They should also explore new security methods, digital asset custody protocols, and interoperability standards. Institutions that act early will likely lead in the evolving world of securities settlement.

Both T+1 and atomic settlement aim to lower risk, simplify processes, and increase efficiency in global finance. The key difference lies in the speed of trade completion and how ready each party is for instant transactions. Organizations that plan well, invest in the right tools, and stay flexible will thrive, regardless of which settlement model prevails.

What’s next?

For the next few Wednesday editions, we’ll keep exploring digital assets in more detail and how they are very different from other asset classes when it comes to global custody and what institutional clients will need from an asset servicing viewpoint. We’ll keep sending our industry news roundup every Friday.