Shortening the settlement cycle for U.S. equities, corporate and municipal bonds and unit investment trust (UIT) trades will help to mitigate counterparty risk, reduce costs and optimize capital, according to a position piece by The Depository Trust & Clearing Corporation (DTCC).
The paper, “DTCC Recommends Shortening the U.S. Trade Settlement Cycle,” details the benefits of shortening the time period for which payment for a securities transaction is completed to two days after the actual trade date (T+2). According to the paper, those benefits will protect financial markets by “mitigating operational and systemic risk by reducing counterparty exposure, pro-cyclicality and liquidity risk from both a clearing agency and member perspective.”
Currently in the U.S., the securities industry completes settlement for trades in equities and certain debt securities on the third day after a trade is executed (referred to as T+3).
DTCC has been the key driver in leading industry discussions surrounding a move to T+2. In the spring of 2012, DTCC commissioned the Boston Consulting Group (BCG) to conduct a cost-benefit study that examined the opportunities and challenges to moving to T+2 or T+1. The results of the BCG study, “Cost Benefit Analysis of Shortening the Settlement Cycle,” were published in October 2012. DTCC then launched a comprehensive assessment of the potential impact on market participants, soliciting feedback from industry associations and one-on-one interviews with more than 50 firms across the industry.
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).
“DTCC is focused on reducing risk in the financial industry, and a shortened settlement cycle is a major step in making the financial markets safer and more secure,” said Murray Pozmanter, DTCC Managing Director and General Manager, Clearing Agency Services. “DTCC will continue to work with regulators, industry organizations and market participants to move this initiative forward to adoption.”
Proposal to Launch a New Cost-Benefit Analysis on Shortening the Settlement Cycle
Global Interest in DTCC’s Position Paper to Shorten Settlement Cycle in U.S.
DTCC’s announcement and position paper to shorten the settlement cycle in the U.S. sparked global interest from stakeholders and generated significant coverage in mainstream media outlets and financial industry publications. In addition, DTCC took its message to Capitol Hill to brief lawmakers on how moving to T+2 would help mitigate counterparty risk, reduce costs and optimize capital.
DTCC’s public recommendation to shorten the settlement cycle garnered articles in Reuters, Bloomberg, TABBForum, Hedgeweek, Banking Technology and Global Custodian, among others. DTCC’s announcement around SSC was also very well received on social media outlets as part of DTCC’s broad outreach program to continue to actively engage with the industry on this important issue. On Twitter, it was mentioned in more than 100 tweets and retweets and it generated more than 5,000 impressions on LinkedIn.
“This type of outreach helps stimulate conversation and enhances the level of feedback we receive from industry participants,” said Marie E. Chinnici-Everitt, DTCC Managing Director and Chief Marketing Officer. “Raising awareness about an important issue, such as this, helps stakeholders focus their collective energies to the benefit of the industry.”
On the Government Relations front, Neil Henderson, Manager Director, DTCC and Brian Werstler, Director, Government Relations, DTCC, participated in a series of meetings on Capitol Hill with lawmakers who sit on various committees as part of a comprehensive outreach program to solicit input and feedback on the T+2 initiative. Henderson and Werstler met with Members from the House Appropriations Subcommittee on Financial Services, House Financial Services Subcommittee on Capital Markets, and the Senate Banking Subcommittee on Securities, Insurance & Investment.
“Meetings with regulators, industry partners and industry organizations lawmakers provide an important forum for the exchange of ideas and feedback on the shortened settlement cycle initiative,” Henderson said. “DTCC will continue to collaborate with key stakeholders in the coming months in support of the move to a T+2 settlement cycle to provide greater certainty and soundness to the financial marketplace.”