T+fewer: Why Settlement Times Keep Falling
By Ryan Burns, head of client services, North America, at Northern Trust Global Fund Services.
When it comes to trade settlement, progress is measured one day at a time. At one point it took five days after the transaction date for an equity trade to settle — hence, “T+5” settlement. Like so many things a decade or two ago, trade settlement was a time-consuming process done manually. As fund operations became more automated, the settlement window has narrowed down from T+5 to T+2.
Reduced settlement times bring other benefits beyond speed and efficiency. Faster settlements improve liquidity as fewer funds are held up in transactions that have yet to settle. Risk exposure is reduced as cash moves from the buyer to the seller’s portfolio and less time is spent dealing with counterparties.
As the saying goes, if it were easy, everyone would do it. The same applies to a two-day settlement cycle. Getting to T+2 required better trade communications, cash reporting and reconciliation processes to improve the post-trade processes. Getting to T+2 took years of discussion between individual companies, industry business associations and regulators. There was plenty of hand-wringing – including some from me – wondering if the industry would be able to make the changes in time.
But things worked out. Although some firms were pressed right up against the deadline, the industry was able to make the switch in 2017 with relatively few glitches. It has been hailed as a successful transition, one where things worked out largely the way they should.
This victory in the U.S. strengthens efforts in other countries to reduce settlement times as well. Japan will move to T+2 next year. Thailand did the same a few months ago. European markets had already made the move nearly four years ago.
This also means many people in the industry are turning to the next goalpost – T+1. DTCC published a white paper outlining a strategy on how to move to a shorter settlement cycle. This might be “late in the night of T+1” or later in the morning on T+2. A DTCC announcement in May 2018 said this next round of compression would also feature additional settlement optimization, “a significant enhancement aimed at removing an entire market day of settlement exposure without eliminating a calendar day from the standard trade settlement process.”
While the move to T+1 would require meeting additional challenges – including settling trades that involve foreign exchanges and settlement across time zones – a bolder move is possible. Leveraging new technology like blockchain actually may be the better bet for future enhancements that will allow the industry and individual firms to more efficiently or effectively trade their portfolios. The process of improving systems and infrastructures is an ongoing one – proceeding day by day – towards the ultimate objective of benefiting the investor.
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