Presidential Directive on Settlement System Improvement at Policy Meeting

President Lee Jae-myung strongly urged the shortening of stock settlement periods at a capital market meeting held at the Blue House on the 18th. South Korea currently operates a 'T+2' system where settlement is completed two days after a stock transaction. President Lee questioned "why should investors have to wait two whole days" and directed officials to review transitioning to a 'T+1' next-day settlement system.

On this day, KOSPI surged over 5% to close at 5,925.03, driven by semiconductor stocks following Nvidia CEO Jensen Huang's praise of Samsung Electronics at a global AI conference. At 2:34 PM, a 'buy-side sidecar' was triggered as the KOSPI 200 futures index rose 5.08% from the previous day, temporarily halting program buy orders. This marked the first buy-side sidecar activation in six trading days since the 10th.

Why Shorten Settlement Periods Now?

Discussions on settlement period reduction are part of a global trend to enhance capital market efficiency and investor convenience. The United States completed its transition to T+1 in May 2024, and the European Union (EU) is preparing for a 2027 transition. South Korea's T+2 system has been criticized for low capital turnover rates and constraints on executing short-term investment strategies, as investors must wait two days to receive cash after selling stocks.

Particularly amid heightened market volatility due to the semiconductor boom and AI frenzy, longer settlement periods increase investors' risk exposure time. President Lee's remarks are interpreted as recognizing that Korean markets must adopt settlement infrastructure on par with advanced markets to secure global competitiveness.

Jeong Eun-bo, Chairman of Korea Exchange, stated at the meeting that the goal is to introduce T+1 by October 2027. However, securities industry officials project the actual implementation date will likely be late 2028, considering system overhauls, regulatory adjustments, and establishing collaborative frameworks among the Korea Securities Depository, securities firms, and banks.

From T+2 to T+1: Evolution of Global Settlement Systems

Shortening stock settlement periods has been a task pursued by global capital markets for decades. Until the 1990s, the United States operated T+5 (settlement after 5 business days), while South Korea operated T+3. As computing systems and communication technology advanced, countries gradually shortened settlement periods.

The United States transitioned to T+3 in 1995, then to T+2 in 2017, and finally to T+1 in May 2024. South Korea has maintained the same system for over 20 years since transitioning from T+3 to T+2 in 2000. During this process, advanced markets like the United States and Europe reduced settlement risk and increased capital efficiency, while South Korea has remained relatively behind.

The key benefit of shortening settlement periods is reduced settlement risk. The longer the time between trade execution and settlement, the greater the risk of unexpected situations such as sharp price movements or counterparty bankruptcy. A T+1 system cuts this risk in half. Additionally, from investors' perspective, receiving sale proceeds quickly enables reinvestment, increasing capital turnover rates.

Future Outlook [AI Analysis]

The T+1 transition is likely to serve as an opportunity to enhance Korean capital markets' global competitiveness. However, several technical and institutional challenges remain before actual implementation. Computer systems of securities firms, banks, and the Korea Securities Depository must be completely overhauled, and foreign investors' currency exchange and remittance processes must be redesigned.

The industry views achieving the 2027 target as challenging. Considering that the United States required over three years of preparation for the T+1 transition, South Korea is projected to need at least 2-3 years of preparation. Particularly given the high proportion of foreign investment in Korean markets, time zone differences with global investors and currency exchange processes must be carefully examined.

Nevertheless, the President's remarks are significant in clearly demonstrating the government's commitment to improving capital market infrastructure. Some analysts suggest that now, with heightened global interest in Korean markets due to the semiconductor boom and AI investment frenzy, is the optimal time to modernize the settlement system. The specific roadmap and implementation plans from relevant agencies will be closely watched going forward.