Post-Trade Utility Enlists Big Players, Issues White Paper
The DTCC is building support to move the industry to a shorter, T+2 settlement cycle for U.S. equities, corporate and municipal bonds and unit investment trust (UIT) trades in a bid to reduce credit and liquidity risks, say officials at the post-trade processing utility.
In addition, JPMorgan and industry groups such as the Investment Company Institute (ICI), the Association of Global Custodians (AGC), the Association of Institutional Investors and SIFMA are endorsing settlement within two days.
Underscoring its intentions, the DTCC is releasing today a white paper outlining the rationale for supporting a move to shorten the settlement cycle. The DTCC is arguing that “shortening the time period between trade execution and settling payment for U.S. cash securities transactions protects the financial markets by reducing credit and liquidity risks to both the industry and the individual investor,” according to a statement.
Now the securities industry settles trades in equities and certain debt securities on the third day after a trade is executed, a process known as T+3.
The DTCC conducted a due diligence process, which included risk studies, a cost-benefit analysis facilitated by the Boston Consulting Group (BCG), and industry outreach before advocating T+2.
“After a comprehensive assessment of the potential impact on market participants, it’s clear that time equals risk. A shortened settlement cycle will substantially reduce risk across the industry and for underlying investors,” says Michael Bodson, president and CEO at DTCC, in a statement.
A shortened settlement cycle would foster a reduction of risk by moving trades more quickly to settlement, enabling funds to be freed up faster for reinvestment and reducing credit and counterparty exposure, say DTCC officials. A shortened settlement cycle would also reduce pro-cyclical increases in margin and liquidity needs that can happen during times of volatility, exacerbating financial instability.
A shortened cycle would further reduce the liquidity requirement of DTCC’s subsidiary, National Securities Clearing Corporation’s (NSCC), “freeing up capital for broker-dealers by reducing the NSCC Clearing Fund requirement,” DTCC officials add.
“Aligning U.S. settlement cycles with global market practices will improve the efficiency of markets and mitigate risks—all changes that will benefit investors,” says Paul Schott Stevens, ICI president and CEO, in a statement.
From the start of the year, industry participants expressed support for T+2 in a time-frame acceptable to the industry.
JPMorgan supports the move to a T+2 settlement period “because diminishing systemic risk is a major priority for us and for our clients,” says Patrick Kirby, chief operations officer of JPMorgan’s Corporate & Investment Bank operations. “Both institutional and retail investors who trade with and through us benefit from the reduction in settlement time.”
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