Eugene Grygo,
chief content editor,
FTF News
Citing systemic risk mitigation, securities industry trade group SIFMA is throwing its support behind a move to shorten the settlement cycle for U.S equities, corporate bonds and municipal bonds. But there will be stones in the road to tighter settlement times.
Currently, the U.S. settles transactions from trade date plus three days (T+3); SIFMA and others want to shrink that to T+2.
An early advocate of shorter settlement, the DTCC began pushing for change two years ago and commissioned a study with the Boston Consulting Group that had input from SIFMA. The study reviewed the costs and benefits of T+2, T+1 and T+0 settlement cycles in the U.S.
The study, which became available in the fall of 2012, found that shortening the settlement cycle will require “upfront investments” with a payback period based on operational cost savings of three years for the T+2 model and a decade for the T+1 model, according those who worked on the report.
The BCG research also revealed that 68% of those surveyed favored a shorter cycle while 27% say such a move is a high priority for achieving efficiency and risk mitigation to the U.S. financial markets.
Since the survey, DTCC officials have been reaching out to asset managers, broker-dealers, custodian banks, and other market participants to build support for shortening the settlement cycle.
In fact, last month Dan Thieke, the DTCC’s managing director and general manager for settlement and asset services said the industry utility has been “getting a lot of interest” about the move to T+2. Thieke spoke during a panel discussion at ISITIC’s 20th Annual Industry Forum and Vendor Show.
But, despite the best efforts of SIFMA and the DTCC, the move to T+2 in the U.S. may have a face some key stumbling blocks.
The first is regulatory burnout. Firms have had to adjust to so many regulatory and market structure changes that they might not eagerly embrace the infrastructure, workflow, staff and IT changes that they will have to make to get to T+2.
Another consideration is finding a time-frame that as SIFMA says is “workable for all market participants” and can help all investors cut systemic risk. SIFMA officials add that a shortened settlement cycle “must be implemented with great care to avoid any operational disruptions” and in a measured way.
SIFMA says that the industry, DTCC and regulators should use key “building blocks” to smooth the transition to T+2, including the compression of time-frames for clearing and settling, specific regulatory rule changes, and changes to the trade affirmation process. Without specifying the activity, SIFMA says that work on building blocks has already commenced.
A third speed-bump for the move to T+2 is the lack of a regulatory mandate, as many industry analysts have mentioned. While firms may be weary of regulatory overhauls, they are required by law to give these efforts priority. Minus the enforcement powers of regulators, T+2 may never become a reality.
Globally, the move would put U.S. markets in line with European and Asian markets that have embraced T+2 earlier. A T+2 settlement cycle could also result in “important reductions in operational risk, more efficient allocation of industry capital, and streamline the clearing and settlement process,” cites Kenneth E. Bentsen, Jr., SIFMA president and CEO, in a statement.
So, if the industry can get past these hurdles, the rewards of T+2 are clear.
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