Citibank, KSD lauded for seamless update of shortened settlement cycle

Citibank Korea headquarters in Seoul / Courtesy of Citibank Korea

Retail investors in Korea can now have their proceeds from the sale of U.S. stocks credited the following business day, aligning with the U.S. settlement cycle shortened in late May, Citibank Korea said Wednesday.

Underpinning the seamless upgrade were months of collaboration between the lender and the Korea Securities Depository (KSD) to bolster flexible reinvestment and cash management for investors in Korea. Institutional investors managing large assets will also benefit.

Since May 28, the proceeds from the sale of U.S. stocks have been credited on the following business day instead of the third day after the date of trade.

This change is due to the shortening of the settlement cycle in the U.S. securities market from two days (T+2) to one day (T+1).

Investors can respond more quickly to market volatility, access new investment opportunities faster and mitigate risks associated with settlement delays from the previous longer settlement cycle. 

In stock trading, losses are incurred due to severe price fluctuations or a failure to fulfill settlement obligations in a timely manner.

The GameStop incident in 2021 highlighted this risk that could affect investors, prompting the U.S. securities industry and investors to request the financial authorities to enhance the soundness and safeness of the financial market and provide a better environment for investors.

The incident in January 2021 involved a dramatic surge in the stock price of GameStop in the U.S. stock market.

The event was triggered when individual investors active on the internet community platform Reddit started buying large amounts of GameStop shares to counter the short positions held by major hedge funds.

As a result, the hedge funds found themselves in a short squeeze, where they had to urgently buy back the stocks they had shorted.

During this period, GameStop's stock price increased by several hundred percent in January 2021 alone, sparking a debate on financial regulation in the stock market.

In response, the U.S. Securities and Exchange Commission formed a consultative body with related institutions and announced that after about an 18-month consultation period, the settlement cycle would be shortened to one day (T+1).

The U.S. stock market's settlement cycle has been shortened three times: from T+5 to T+3 settlement in 1995, from T+3 to T+2 in 2017 and recently from T+2 to T+1 on May 28.

Citibank, which provides global custody services to over 600 financial institution clients across 100 countries, has been meticulously preparing to ensure smooth securities settlement, especially with the KSD for Korean retail investors.

This preparation has successfully supported the implementation of the T+1 settlement cycle in the U.S., Canada and Mexico markets for the KSD as well as other local and global clients in May this year.

Citi has been a major partner in handling foreign securities settlement and custody for domestic retail investors for 20 years in Korea, having signed a global custody service contract with KSD in 2003.

Leveraging its extensive experience and know-how accumulated from dealing with financial institutions worldwide, Citi has worked closely with the KSD since the first half of 2023 to resolve issues related to foreign securities operations for domestic investors and securities firms in Korea in preparation for the upcoming U.S. settlement cycle change.

Both organizations have expanded and automated their IT systems, proactively improving their processes to handle early morning, holidays and Saturday morning tasks.

These improvements include the shortened settlement cycle and enhancing services to accommodate the time difference with the U.S.

They have also collaborated to establish emergency protocols for exceptional situations such as IT failure, thereby creating a more stable investment environment for investors in Korea.

Citi Korea actively leveraged a dedicated service team for the KSD and domestic and global experts to constantly support the KSD.

It invited an expert from Citi U.S. to participate in seminars and training sessions hosted by the KSD for around 25 domestic securities firms, addressing upcoming regulatory changes in the U.S. and gathering feedback, which was well received by both the KSD and securities firms in Korea.

Through these preemptive and proactive efforts by the two organizations, the settlement of U.S. stock transactions for Korean investors has been processed smoothly and without significant issues or confusion, even after the dramatic shortening in the settlement cycle from May 28.

Citibank Korea CEO Yoo Myung-soon said, "The global capital market is continuously evolving, accompanied by rapid changes in systems, and Citibank is striving to promptly adapt to these changes."

"Citibank Korea deeply understands the significant role of the KSD in the Korean financial market and has closely collaborated to ensure the success of the recent project to shorten the U.S. stock settlement cycle," she said.

"Moving forward, we will continue to work together with the KSD and domestic financial institutions to contribute to the growth of the Korean capital market."

The KSD said the shortening of the settlement cycle in the U.S. is an important achievement and milestone, providing an opportunity to review and improve the efficiency of Korea's foreign security settlement system.

"KSD will work with prominent financial institutions to enhance the soundness and safeness of the domestic stock market and provide a better environment for investors in Korea amidst the continuous changes in the global capital market."