Global investment banks are cautioning that South Korea's proposed eight- to nine-month preparation window for shifting to a T+1 stock settlement cycle is insufficient, citing automation gaps and foreign exchange hurdles that typically demand at least 18 months to resolve.

T+1 settlement requires stock trades to be completed one business day after execution, compared with Korea's current T+2 framework.

Consultations Underway as Deloitte Anjin Prepares Key Report

The Financial Services Commission is currently consulting foreign investment banks on matters including foreign exchange transactions, settlement procedures, and the implementation timetable, according to financial industry sources who spoke Wednesday.

Separately, the Korea Exchange and Korea Securities Depository have commissioned Deloitte Anjin to study the proposed transition. That report, expected by the end of December, is anticipated to serve as the foundation for detailed implementation plans.

Foreign banks say they cannot launch full-scale preparations until authorities confirm 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."

This means detailed industry planning may not commence until late this year, leaving only eight to nine months if Korea proceeds with the transition next year.

T+1 Is No Quick Switch

South Korea is seeking to join a global shift toward faster settlement led by the United States, which completed its own T+1 transition on May 28, 2024. The United Kingdom and European Union are also advancing toward T+1, with both targeting implementation around late 2027.

However, foreign banks note that international experience demonstrates that shortening the settlement cycle requires extensive preparation and adjustments tailored to each market's trading, foreign exchange, and post-trade infrastructure. The US transition itself took roughly two years from formal rulemaking to implementation, and involved extensive industry-wide testing.

Japan has yet to move forward with T+1, with market participants there questioning whether the immediate benefits would justify the cost and complexity of the transition.

Other Asian markets have also encountered difficulties during settlement reforms. Hong Kong faced 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 illustrate 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.

Automation Gap Raises Operational Risks

The biggest concern is the absence of a fully automated straight-through processing system, known as STP, which enables trade information to flow 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 identified 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."

Speed Alone Will Not Draw Global Capital

The South Korean 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 investment 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 carry greater weight in investment decisions. South Korea has been working to address long-standing barriers to foreign capital, including its push for inclusion in the MSCI developed-market index, which hinges partly on market accessibility improvements.

"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.