SEOUL: South Korea’s plan to shorten its stock settlement cycle to T+1 has drawn calls for caution from global investment banks, which say the proposed eight to nine-month preparation period is too short for an overhaul that typically requires at least 18 months.
T+1 requires stock trades to be settled one business day after execution, compared with South Korea’s current T+2 system.
The Financial Services Commission is consulting foreign investment banks on issues including foreign exchange transactions, settlement procedures and the implementation timetable, financial industry sources said yesterday.
The Korea Exchange and Korea Securities Depository have also commissioned Deloitte Anjin to study the proposed transition.
The report is due by the end of December and is expected to form the basis for detailed implementation plans.
Foreign banks said they cannot begin full-scale preparations until authorities confirm the system requirements and operating procedures.
“We still lack details on how the transition will be implemented,” an official at a foreign investment bank said. “The Deloitte Anjin report expected in December should provide more guidance.”
That means detailed industry planning may not begin until late this year, leaving only eight to nine months if South Korea proceeds with the transition next year.
South Korea is seeking to join a global shift towards faster settlements led by the United States, with the United Kingdom and European Union also moving towards T+1.
But foreign banks said overseas experience showed that shortening the cycle requires extensive preparation and adjustments tailored to each market’s trading, foreign exchange and post-trade infrastructure.
Japan has yet to move forward with T+1, with market participants questioning whether the immediate benefits would justify the cost and complexity of the transition.
Other Asian markets have also faced difficulties during settlement reforms.
Hong Kong encountered concerns over infrastructure readiness and implementation schedules during discussions about shortening its settlement cycle.
India’s transition towards faster settlements highlighted the risks of relying on manual processes, with industry participants warning that compression without sufficient automation could increase operational workloads and settlement failures.
Foreign banks said those cases demonstrate that T+1 requires more than a regulatory decision.
Systems for trading, settlement, foreign exchange, custody and other post-trade functions must all be upgraded and tested together.
South Korea faces additional complications because of cross-border investment flows and gaps in automation, they said.
The biggest concern is the lack of a fully automated straight-through processing system, known as STP, which allows trade information to move from execution to settlement without manual intervention.
“The biggest issue is that we don’t have STP automation,” the foreign bank official said.
“You trade, and then you need to upload the information into the KSD system. It is manual, and someone needs to physically be there.” — The Korea Herald/ANN
