Settle down – But are we prepared?
(2025) BUSN79 20251Department of Business Administration
- Abstract
- This paper examines the consequences of the US transition from a T+2 to a T+1 settlement cycle. We assess whether the reform enhanced market liquidity, increased settlement frictions, and whether effects varied across firm types and time horizons. Using a Difference-in-Differences design with matched US–EU firm-level data, we evaluate short-, mid-, and long-term impacts on three liquidity proxies: CHL Spread, Amihud Illiquidity, and Dollar Volume. Failures-to-Deliver (FTDs) are analyzed separately through an event study on US firms. The regression framework includes firm fixed effects and two-way clustered standard errors. To capture heterogeneous treatment effects, we interact the T+1 indicator with Hard-to-Borrow (HTB) status. Results... (More)
- This paper examines the consequences of the US transition from a T+2 to a T+1 settlement cycle. We assess whether the reform enhanced market liquidity, increased settlement frictions, and whether effects varied across firm types and time horizons. Using a Difference-in-Differences design with matched US–EU firm-level data, we evaluate short-, mid-, and long-term impacts on three liquidity proxies: CHL Spread, Amihud Illiquidity, and Dollar Volume. Failures-to-Deliver (FTDs) are analyzed separately through an event study on US firms. The regression framework includes firm fixed effects and two-way clustered standard errors. To capture heterogeneous treatment effects, we interact the T+1 indicator with Hard-to-Borrow (HTB) status. Results show that the shift to T+1 improved liquidity, particularly for HTB equities in the short run. However, the transition initially triggered a spike in FTDs as intermediaries adjusted. Over time, liquidity gains fade, suggesting the reform delivered front-loaded efficiency gains that level off as markets recalibrate. (Less)
- Popular Abstract
- What happens when the US shortens its settlement cycle from two days to one? This study investigates how the move to T+1 affects the ability to trade (liquidity) and the risk that trades fail to settle on time (failures-to-deliver). By comparing similar firms in the US and Europe, we find that the reform made it easier and cheaper to trade—especially in stocks that are harder to borrow. However, the transition caused temporary disruptions as market participants adapted. Over time, the benefits faded, suggesting the gains were mostly short-term. Our findings matter for policymakers considering similar reforms in other markets.
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9207045
- author
- Widmark, Adam LU and Bramer, Carl LU
- supervisor
- organization
- alternative title
- Consequences of the US transition to a T+1 settlement cycle
- course
- BUSN79 20251
- year
- 2025
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Market Liquidity, Failures-to-Deliver (FTDs), Hard-to-Borrow (HTB), Margin Requirement, Transaction Cost, Market Depth, Central Counterparty (CCP)
- language
- English
- id
- 9207045
- date added to LUP
- 2025-06-30 11:09:02
- date last changed
- 2025-06-30 11:09:02
@misc{9207045, abstract = {{This paper examines the consequences of the US transition from a T+2 to a T+1 settlement cycle. We assess whether the reform enhanced market liquidity, increased settlement frictions, and whether effects varied across firm types and time horizons. Using a Difference-in-Differences design with matched US–EU firm-level data, we evaluate short-, mid-, and long-term impacts on three liquidity proxies: CHL Spread, Amihud Illiquidity, and Dollar Volume. Failures-to-Deliver (FTDs) are analyzed separately through an event study on US firms. The regression framework includes firm fixed effects and two-way clustered standard errors. To capture heterogeneous treatment effects, we interact the T+1 indicator with Hard-to-Borrow (HTB) status. Results show that the shift to T+1 improved liquidity, particularly for HTB equities in the short run. However, the transition initially triggered a spike in FTDs as intermediaries adjusted. Over time, liquidity gains fade, suggesting the reform delivered front-loaded efficiency gains that level off as markets recalibrate.}}, author = {{Widmark, Adam and Bramer, Carl}}, language = {{eng}}, note = {{Student Paper}}, title = {{Settle down – But are we prepared?}}, year = {{2025}}, }