The Korea Exchange (KRX) will release a roadmap in October for shortening the settlement cycle in South Korea's stock market to one business day after the trade date (T+1) from the current two business days (T+2). The roadmap will cover rule changes, system overhauls, a phased timeline and plans for integrated testing. After publishing the roadmap, the KRX plans to gather feedback from market participants, draw up detailed operating standards and set the final launch date with financial regulators.
"We are preparing a roadmap for shortening the settlement cycle with a consulting firm, and we are working toward an October release," Choi Hoon, a director at the Korea Exchange, said at an in-depth forum on shortening the securities market settlement cycle to T+1, held on the 2nd at the Korea Financial Investment Association in Seoul's Yeouido district. "We will lay out not only the main rule changes and system overhauls but also the implementation timeline and testing plans."
The forum was attended by Korea Financial Investment Association Chairman Hwang Sung-yeop, Park Yong-jin, vice chairman of the presidential committee on regulatory rationalization, Dongguk University professor Lee Jun-seo, Kang So-hyun, a research fellow at the Korea Capital Market Institute, and officials from the KRX and the market.
In congratulatory remarks, Park said shortening the settlement cycle is a matter of reducing the time that retail investors' money is unnecessarily tied up and of raising the competitiveness and credibility of South Korea's capital market. "If there is agreement on the direction, on the premise that market stability and investor protection are sufficiently secured, we need to move aggressively so the timing of the rule change can be brought forward as much as possible," he said.
The KRX also plans to include a schedule of repeated integrated tests in the roadmap. Shortening the settlement cycle requires simultaneous changes to the computer systems and business practices of all market participants — not only the exchange and the Korea Securities Depository but also brokerages, asset managers, custodian banks and pension funds. The plan also reflects concerns that a settlement failure caused by insufficient preparation at some institutions could undermine confidence in the entire market.
The October roadmap will not immediately fix the launch date. After releasing it, the KRX will collect suggestions and proposed improvements from retail investors, the financial investment industry and institutional investors at home and abroad. It will then work out ways to resolve the issues raised and present detailed operating standards to be applied commonly by market participants. "We will look at trends in global markets and competing countries, gather industry views, and finalize a stable implementation date with financial regulators," Choi said.
Foreign investors also broadly support the shift to T+1. "When we asked foreign financial firms, global investors said that, all else being equal, they favor an earlier settlement cycle," an official at the Korea Financial Investment Association said. "That is because it improves the efficiency of settlement funds and reduces the burden on brokerages and settlement banks."
Still, settlement for overseas investors is more complex than for retail investors. Global asset managers place orders for multiple funds at once, and once trades are executed the shares must be allocated back to individual accounts. Domestic custodian banks must reconcile settlement instructions sent by overseas custodian banks with trade details relayed by foreign brokerages through the Korea Securities Depository, and must also verify won balances for purchases and share balances for sales.
The time difference between South Korea and the United States and the conversion of won were singled out as the key challenges. New York and Seoul are 13 hours apart, and if trading hours in the domestic market are extended, overseas investors will have even less time to handle trade confirmation, account allocation, currency conversion and settlement instructions. For foreign investors, T+1 could effectively function like same-day settlement.
The Korea Securities Depository plans to build a system that automates the confirmation and settlement process for foreign investors' trades, cutting related processing time by more than half. The aim is to automate fund-by-fund allocation and trade confirmation, some of which is now done manually, to reduce overnight workloads caused by the time difference and the risk of settlement failures.
Retail investors will also see notable changes. Under T+1, the point at which investors can withdraw proceeds from a stock sale comes a day earlier, but so does the deadline for paying for purchases. The timing of unpaid balances and forced liquidations, which are linked to the settlement date, may also move up. The last day to buy shares to receive a dividend, the ex-dividend date and trading schedules tied to year-end determination of major shareholder status will also need to be adjusted.
Speakers also said the market must prepare for a possible increase in temporary settlement failures as preparation time shrinks. The domestic market has so far focused on keeping settlement failures at effectively zero, but under a T+1 regime there is less time to secure cash or securities, which can lead to processing delays.
"A settlement failure should not immediately be seen as a sign of a financial firm's insolvency or a credit problem," Kang said. "Rather than trying to prevent failures unconditionally, we need an approach that quickly identifies the cause and determines who bears the cost of sourcing the missing cash and securities."
