Market participants in South Korea's securities market have emphasized the need for thorough preparation and verification before implementing a reduction in the settlement cycle from the current T+2 (two business days after the transaction) to T+1.
On September 2, the Financial Investment Association held a 'Deep Discussion on Settlement Cycle Reduction' to address the necessity of shortening the settlement cycle, key issues, and the response tasks for market participants.
During the discussion, concerns were raised about potential technical failures, settlement failures, and issues related to foreign investors' currency exchange and funding if the settlement cycle is reduced by one day.
Choi Hoon, Deputy Director of the Korea Exchange, stated, "While early implementation of the settlement cycle reduction is important, ensuring a stable transition is also crucial. Not only securities firms and exchanges but also infrastructure institutions such as the Korea Securities Depository, the Bank of Korea, and Korea Securities Finance, as well as asset management companies, pension funds, and foreign investors' currency exchange processes, must all adapt together. This requires sufficient time for the system to be securely established."
Members of the securities industry echoed the need for ample preparation time, noting that settlement failures could undermine overall market trust.
Park Sang-hyun, Deputy General Manager of NH Investment & Securities, remarked, "Clearing and settlement is an issue that involves all member securities firms. If one or two companies experience settlement failures, it will inevitably damage the trust of the entire market." He added, "We need to allow enough time for all market participants to adapt and be patient."
Concerns were also raised regarding foreign investors, who reportedly worry more about the risk of settlement failures than the benefits of transitioning to T+1.
Kim Mi-kang, a director at SC Bank, noted, "Among foreign investors, the risk of settlement failure is more pronounced than the benefits of shortening the settlement cycle to T+1." She explained, "In Korea, multiple regulatory relaxations and institutional changes are being implemented simultaneously to promote foreign investment. In this context, if the settlement cycle is shortened in a short period, it could place a burden on the stable settlement infrastructure."
Baek Dae-man, a team leader at the Financial Investment Association, emphasized the need to consider the geographical and temporal characteristics of the Korean market. He stated, "Located in Northeast Asia, Korea starts trading earlier than almost any other country, alongside New Zealand and Japan. Considering time differences and currency exchanges, the current T+2 environment already presents challenges in the settlement process."
He added, "Foreign institutional investors are showing significant interest in the process and roadmap for shortening Korea's settlement cycle."
Some participants suggested that settlement failures should not only be viewed as risks to eliminate but also as risks to be managed within the market operation process. Kang So-hyun, a researcher at the Capital Market Research Institute, pointed out, "In Korea, there have been very few cases of settlement failures, so if one occurs, it may create the perception that there is a problem with the securities firm. In the U.S., settlement failures occur in about 2-3% of all transactions."
He continued, "Reducing the settlement cycle to one day will inevitably decrease the time available to adjust or correct issues during the settlement process, increasing the likelihood of temporary fund delays or operational disruptions. Rather than aiming for a 'zero' settlement failure rate, we need to shift our perspective towards managing the risks that can reasonably occur during market operations."
The Financial Investment Association plans to continue discussions on the industry's response to the shortening of the settlement cycle based on the opinions raised during this forum.
* This article has been translated by AI.
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