Exchange's Immediate Response to Presidential Remarks

Korea Exchange Chairman Chung Eun-bo announced plans to shorten the stock settlement cycle from the current two business days (T+2) to one business day (T+1) by October 2027. This came as an immediate response during the "Capital Market Stabilization and Normalization Meeting" held at the Blue House on the 18th, after President Lee Jae-myung pointed out issues with the current settlement system.

At the meeting, President Lee raised concerns about "the current system where it takes two business days to receive payment after selling stocks." Chairman Chung responded by referencing the settlement cycle shortening trends in the U.S. and Europe, stating, "We will align with Europe and transition to T+1 by October 2027."

Global Stock Markets' Settlement Cycle Shortening Trend

Shortening the stock settlement cycle has already become a global standard. The United States completed its transition to the T+1 system in May 2024, and the European Union (EU) is also preparing for implementation targeting October 2027. With this announcement, the Korea Exchange has clarified its position to pursue the transition at the same time as Europe.

The T+1 transition increases capital turnover rates and reduces settlement risks from investors' perspective. Being able to secure cash just one day after selling enables faster reinvestment and lowers the possibility of settlement defaults. However, market infrastructure including securities firms and the Korea Securities Depository faces challenges of system reorganization and business process redesign.

Determination to Resolve the Korea Discount

The meeting that day went beyond settlement cycle shortening to present the overall reform direction for Korea's capital market. President Lee expressed strong determination for market normalization, stating, "If we make efforts, not only can we eliminate the Korea discount, but a Korea premium is also possible."

Specific reform tasks discussed included banning dual listings of parent-subsidiary companies, confiscating principal from stock manipulation forces, and strengthening exit of distressed companies. Financial Services Commission Chairman Lee Bok-hyun stated, "We will establish concrete standards to fundamentally prohibit dual listings." KB Securities analyst Kim Dong-won pointed out that Korea's dual listing ratio stands at 20% of total market capitalization, which is 400 times that of the U.S., 10 times that of China, and 5 times that of Japan.

A reorganization plan to divide the KOSDAQ market into mature company and growth company segments is also being pursued. President Lee emphasized, "For stock manipulation forces, we will confiscate not just illicit gains but also the principal," adding, "Informants will receive 30% rewards without an upper limit, and even direct participants can receive rewards and reduced sentences if they provide decisive evidence."

During the meeting, the KOSPI expanded its gains, even triggering a sidecar. The market is interpreted to have positively received the government's determination to normalize the capital market.

Impact on the Korean Market

The T+1 transition could serve as an opportunity for Korea's stock market to be recognized as a market that meets global standards. For foreign investors, as a settlement environment identical to the U.S. and Europe is established, accessibility to the Korean market increases. Particularly considering the time difference with the U.S. market, the T+1 system facilitates strategies to reallocate funds between the closing of Asian markets and the opening of U.S. markets.

However, securities firms need to strengthen risk management due to system investment burdens and shortened operating hours. As settlement closing times are moved up, back-office work efficiency and automation become essential. An industry official said, "Just as there was initial confusion during the U.S. transition, sufficient preparation time and pilot operations are important."

The Korea Exchange plans to form a consultative body with securities firms and the Korea Securities Depository to establish a detailed transition roadmap. During the approximately year-and-a-half preparation period until October 2027, system reorganization, regulatory arrangements, and market participant education are expected to proceed sequentially.