Foreign banks warn Korea is rushing T+1 shift

South Korea’s plan to shorten its stock settlement cycle to T+1 is drawing warnings 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 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 Wednesday.

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 say 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 Korea proceeds with the transition next year.

Korea is seeking to join a global shift toward faster settlements led by the United States, with the United Kingdom and European Union also moving toward T+1.

But foreign banks say overseas experience shows 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 toward 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 say 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.

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 shorter settlement window would leave less time to verify trades, correct errors and secure the cash or securities needed to complete transactions.

“Without STP, the only option under T+1 would be to have people working overnight in Korea,” the official said. “Finding properly trained staff to do that repeatedly would be costly and difficult.”

Foreign banks also pointed to time-zone differences and foreign exchange procedures as major hurdles.

The US transition largely involved domestic investors trading dollar-denominated assets within the same financial system. Korea’s market involves a larger cross-border component, requiring overseas investors to coordinate securities settlements with won funding.

“Someone in California who wants to buy Korean stocks faces a practical logistical issue because of the time difference and the foreign exchange arrangements,” the official added.

“When you make an operational mistake under T+2, there is still some time to correct it. But if you compress the settlement cycle without automated STP and proper testing, operational risk rises significantly.”

The government expects T+1 to reduce settlement risk, improve capital efficiency and increase market liquidity by allowing investors to reuse funds more quickly.

Foreign banks acknowledge those benefits but question whether faster settlements would materially increase overseas investments in Korean stocks.

“T+1 has some benefits in reducing settlement risk, but it is not the main driver for foreign investors,” another industry official said.

For global funds, broader market-access issues have a greater influence on investment decisions.

“Foreign investors are more concerned about issues such as prefunding requirements and offshore foreign exchange access,” he said. “Those are much bigger factors affecting market accessibility.”

Foreign institutions are therefore urging Korean authorities to allow sufficient time for system development, marketwide testing and coordination with overseas investors before setting a firm launch date.

“A compressed timetable could undermine the intended benefits of T+1 by raising operating costs and settlement risks, particularly for cross-border transactions,” the official added.