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MEMORANDUM

TO: Securities and Exchange Commission of Pakistan (SECP) & Ministry of Finance

FROM: AKD Securities Ltd (REP -019)

DATE: March 6, 2026

RE: Reversion of Settlement Cycle from T+1 to T+2: Addressing Market Stability and Operational Viability Concerns

 

INTRODUCTION

The transition of the Pakistan Stock Exchange (PSX) to a Trade plus One (T+1) settlement cycle represented a significant modernization initiative, reflecting global best practices in capital market infrastructure. While this move was well-intentioned and aligned with contemporary international standards, the current implementation has resulted in financial and systemic challenges which are misaligned with the country’s regulatory environment, technological maturity, and institutional capacity. The evidence from market behavior since implementation, correcting almost 20%, suggests that the immediate reversion to T+2 settlement is a prudent measure to restore market stability, protect market participants, and preserve market confidence during this critical period of digital transformation. This memo outlines critical disadvantages of T+1 relative to T+2 settlement that necessitate urgent policy reconsideration.

 

KEY DISADVANTAGES OF T+1 SETTLEMENT

1.      Banking System Cheque Clearance Cycle Mismatch: Pakistan's banking infrastructure operates on a two-day cheque clearing cycle (T+2) as mandated by the State Bank of Pakistan. T+1 settlement requires client funds to be available within 24 hours, creating a fundamental structural incompatibility. Clients remitting cheques for settlement cannot guarantee funds availability within the T+1 window, forcing either settlement failures (and sell-offs in ready markets). This friction directly contradicts the goal of market efficiency.

2.      Inadequate Liquidity Management Infrastructure: The shorter settlement timeline requires market participants to maintain significantly higher liquid reserves to cover obligations within 24 hours.

3.      Market volumes have diminished as brokers face obstacles: Under T+1, brokers are forced to demand upfront fund deposits from clients before executing trades, or they face expensive repo financing from banks. This daily liquidity cost renders margin trading and credit-based participation economically unviable. Consequently, brokers are unwilling to serve clients operating on credit, shrinking market volumes.

4.      Effective Timeline Was Already T+3, Now Problematically Compressed to T+1: The operational reality pre-T+1 was that clients depositing cheques at day-end faced T+2 clearing from banks, creating an effective T+3 settlement cycle. By jumping directly to T+1 without building infrastructure, PSX compressed the practical timeline by 50% overnight. Brokers cannot manage this abrupt change; clients cannot adjust behavior fast enough; and the market is experiencing settlement friction daily.

5.      Client Non-Compliance Due to Lack of Awareness and Systems Readiness: Many clients have not acknowledged or internalized the T+1 settlement requirement, specially under Ramazan timings, where banks are operating at half-day cycles.

6.      Insufficient Technology and Systems Readiness: Pakistan's banking and brokerage infrastructure has not undergone the necessary digital transformation to support accelerated settlement cycles.

7.      Exponential Increase in Operational Costs: Accelerated settlement requires enhanced back-office staffing, 24-hour operational capabilities, advanced technological infrastructure, and redundancy systems. These costs disproportionately burden smaller brokers and institutions, reducing market competition, narrowing profit margins, and potentially forcing market exits of smaller participants.

8.      Compromised Risk Management Capacity: T+1 leaves limited time for brokers to verify client creditworthiness, monitor counterparty risk, and implement corrective measures before settlement obligations happen. This reduced risk assessment window increases systemic vulnerabilities and the probability of settlement failures across interconnected participants.

9.      Heightened Cybersecurity and Operational Vulnerabilities: Faster settlement cycles with compressed reconciliation windows reduce the margin for error detection and fraud prevention. Another option is for brokers to be relieved to  opt out of the responsibility of KYC.

10.  Pakistan Is the 8th Country to Implement T+1 Without Realizing Any Benefits: Pakistan's implementation of T+1 is not delivering the expected efficiency benefits. Market volumes have contracted, volatility has increased, settlement failures are up. Globally, the 7 countries that implemented T+1 earlier (United States, Canada, Mexico, Argentina, India, Jamaica and China).