The Depository Trust and Clearing Corporation (DTCC), in collaboration with the financial services industry, has formed an industry steering committee to drive the implantation of two-day settlement cycle (T+2) in the US.
DTCC has teamed up with an industry working group to facilitate the move to shorten the settlement cycle in the US for trades in equities, corporate and municipal bonds, and unit investment trusts (UITs).
The move from the current three-day settlement cycle (T+3) to a T+2 cycle will reduce operational and systemic risk by limiting exposure and creating greater efficiencies in trade processing.
Co-chaired by Kathleen Joaquin, chief industry operations officer at the Investment Company Institute (ICI), and Tom Price, managing director, operations, technology & business continuity planning at the Securities Industry & Financial Markets Association (SIFMA), the Industry Steering Committee (ISC) comprises senior-level representatives from associations and firms representing stakeholders, including buy-side and sell-side firms.
Serving as the voice of the industry, the ISC will be responsible for overseeing the US move to T+2; driving the deliverables of the Industry Working Group (IWG); providing guidance and support to address technological and process building blocks; and communicating changes to the industry. The IWG, under the guidance of the ISC, is responsible for identifying and executing a tactical plan to implement the business and rule changes required to shorten the US settlement cycle to T+2 in a timeframe that is acceptable for the industry. IWG members include a cross-section of industry participants.
“Shortening the settlement cycle will foster greater certainty, safety and soundness in the US capital markets by substantially reducing risk across the industry and for the individual investor,” says Price. “The formation of the steering committee and working group is key to ensuring that perspectives from across the industry are heard and taken into consideration as these groups move toward determining the best approach and the implementation timeline for reaching a T+2 cycle.”
“The voluntary move to a T+2 settlement cycle for securities currently settling at T+3 will result in a meaningful reduction in liquidity and operational risks, will promote better use of capital, and will create significant process efficiencies for market participants—all changes that will benefit investors,” says Joaquin.
As part the ISC’s commitment to informing the industry on topics related to shortening the settlement cycle in the US, an independent website, www.UST2.com, has been created to provide the public with an information hub focused on the move to T+2. The website includes details pertaining to the background and purpose of the initiative; progress being made by the ISC and IWG; next steps; and other educational information.
As a result of comprehensive cost-benefit and risk studies, including substantive discussions with the industry, DTCC, in collaboration with key industry associations, concluded that shortening the time period between trade execution and settling payment for US cash securities transactions safeguards and protects the integrity of the financial markets by reducing credit and liquidity risks to both the industry and the investors.
A shorter settlement cycle will reduce risk by moving trades more quickly to settlement, enabling funds to be freed up faster for reinvestment, and reducing credit and counterparty exposure. It also reduces pro-cyclical increases in margin and liquidity needs that may occur during times of volatility. Lastly, it will reduce the liquidity and margin requirements of DTCC’s subsidiary, National Securities Clearing Corporation (NSCC), reducing NSCC’s liquidity costs and freeing up capital for broker-dealers by reducing the NSCC Clearing Fund requirement.
A shorter cycle will enable investors to gain quicker access to funds and securities following a trade execution. During periods of market stress and volatility, the investor also will be better protected, as a shorter cycle will reduce the risk of a broker defaulting between the trade date and settlement date.
According to an October 2012 cost-benefit analysis conducted by the Boston Consulting Group (BCG) and commissioned by DTCC, moving from a T+3 settlement cycle to a T+2 settlement cycle in the US would initially cost the industry approximately USD550 million and result in savings of approximately USD195 million annually. This translates into a recovery of investment of between 2.5 and 3.5 years.
Settlement cycles vary across geographies and asset classes. Many European Union member states have moved to T+2 as of 6 October 2014 in advance of the SSC mandate included in the EU’s Central Securities Depository Regulation (CSDR), which will take effect in January 2016. A number of markets in the Asia/Pacific region are already on T+2 or T+1, while others are looking to reduce their settlement cycle from T+3.
Expressions of support for a move to T+2, in a timeframe acceptable to the industry, were received from various industry groups, including ICI, SIFMA, the Association of Global Custodians (AGC), and the Association of Institutional Investors.