Securities Industry Backs Shorter Settlement

Terry Flanagan

A transition to shorter settlement for U.S. securities transactions has the backing of Depository Trust & Clearing Corp. and the securities industry.

DTCC recommends shortening the U.S. trade settlement cycle from T+3 (trade date plus three days) to T+2 (trade date plus two days) and will work with the industry to establish an implementation timeline. Once achieved, DTCC recommends a pause and further assessment of industry readiness and appetite for a future move to T+1.

“There’s currently no defined time line by which we would implement T+2,” said Neil Henderson, managing director of clearing at DTCC. “The next step for us is to work with the industry and Sifma to form a steering group and any necessary working groups underneath that to confirm the building blocks necessary to achieve a move to T+2.”

Expressions of support for a move to T+2, in a timeframe acceptable to the industry, have been received from various industry groups, including the Investment Company Institute, the Association of Global Custodians, and the Securities Industry and Financial Markets Association.

“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,” said Patrick Kirby, chief operations officer of J.P. Morgan’s Corporate & Investment Bank Operations, in a statement. “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.”

Thirteen years ago, the industry was examining a move to a T+1 settlement cycle. The initiative was abandoned as a result of competing priorities. There have been significant improvements since that time that make this a timely opportunity to shorten the settlement cycle.

Shortening the settlement cycle mitigates operational and systemic risk by reducing counterparty exposure, procyclicality and liquidity risk from both a clearing agency and member perspective. It also frees up capital for DTCC member broker-dealers.

DTCC’s recommendation is based, in part, on a cost-benefit analysis performed by the Boston Consulting Group, which estimated an industry cost of approximately $550 million to shorten the settlement cycle to T+2 and that such a move could be achieved within three years.

“We’ll assess what time line is viable, not just in the context of moving to T+2 itself, but also in the context of all the other initiatives that firms now have as a result of regulatory changes and any other initiatives they may be engaged in,” said Henderson. “This will ensure we can arrive at a timetable that is acceptable to the industry and doesn’t put the industry at risk.”

In Europe, Germany currently settles on T+2, and the rest of Europe settles on T+3. There is an initiative in Europe to centralize the settlement of securities called Target 2 Securities (T2S), which is being run by the European Central Bank.

“Currently, all securities settle locally by market within Europe, so there’s a large number of CSDs in Europe,” Henderson said. “That is the reason they moved to one cycle, which is T+2, to achieve harmonization of settlement cycles in Europe. This enables them in turn to introduce Target 2 Securities, which is the central settlement platform in Europe. That’s going to be rolled out in stages progressively between 2015 and 2017.”

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