The Depository Trust & Clearing Corporation (DTCC) has released a white paper outlining the rationale for supporting a move to shorten the settlement cycle (SSC) in the US financial markets for equities, corporate and municipal bonds and unit investment trust (UIT) trades.
DTCC’s view is that shortening the time period between trade execution and settling payment for US cash securities transactions protects the financial markets by reducing credit and liquidity risks to both the industry and the individual investor.
Currently, the securities industry completes settlement for trades in equities and certain debt securities on the third day after a trade is executed. This three-day period is referred to as T+3.
After conducting a robust due diligence process, which included risk studies, a cost-benefit analysis facilitated by the Boston Consulting Group (BCG), and industry outreach, DTCC is advocating for a move to a two-day settlement period, or 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. “As the industry is focused on mitigating operational and systemic risk and protecting the integrity of the US financial system, DTCC supports this critical step that will create greater certainty, safety and soundness in the capital markets.”
A shortened settlement cycle would mitigate risk for all industry participants – including the individual investor. First, it will 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. Second, a shortened settlement cycle would reduce procyclical increases in margin and liquidity needs that can happen during times of volatility, exacerbating financial instability. Finally, 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.
“ICI strongly supports DTCC’s efforts to shorten US settlement cycles on a timeframe that works for industry participants. Aligning US settlement cycles with global market practices will improve the efficiency of markets and mitigate risks—all changes that will benefit investors,” says ICI president and CEO Paul Schott Stevens. “Funds and their investors benefit from efforts of this kind to strengthen our financial system, and we applaud DTCC’s efforts.”
In the first half of 2014, expressions of support for a move to T+2, in a timeframe acceptable to the industry, were received from various industry groups, including the Investment Company Institute (ICI), the Association of Global Custodians (AGC), the Association of Institutional Investors and the Securities Industry and Financial Markets Association (SIFMA).
“J.P. Morgan 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 J.P. Morgan’s corporate and investment bank operations. “Both institutional and retail investors who trade with and through us benefit from the reduction in settlement time. This is a very significant step in making the industry safer and more reliable.”
DTCC will continue to partner closely with market participants and industry organisations on the US shortened settlement cycle initiative as a steering committee and working parties are formed, and as decisions are made around approach and timelines.