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Preparing for the Move to T+2
Dan Thieke, Managing Director, General Manager, Settlement and Asset Services, DTCC.

Q&A with Dan Thieke, Managing Director, General Manager, Settlement and Asset Services, DTCC

The financial services industry, in coordination with applicable regulators, is planning to shorten the settlement cycle for U.S. equities, corporate bonds, municipal bonds, unit investment trusts (UITs), and financial instruments comprised of these security types (e.g. ADRs, ETFs), from the current trade date plus three business days (T+3) to trade date plus two business days (T+2) on September 5, 2017.

Dan Thieke, Managing Director, General Manager, Settlement and Asset Services at The Depository Trust & Clearing Corporation, explains the importance of the move from T+3 to T+2 and the key benefits to DTCC and its clients, as well as wider industry infrastructures and end users. He also takes a look ahead to the future of accelerated settlement of T+1 and T+0.

Please tell us why the move to T+2 is such an important change for the US financial services industry?

The move to T+2 is one of the largest industry-driven initiatives ever undertaken by the U.S. financial services industry. The reduction in risk associated with eliminating one extra day of processing is something the entire industry is on-board with. When the topic of shortening the settlement cycle was initially discussed, it became clear that the costs associated with moving to T+2 were reasonable compared to the benefits received, versus moving to a T+1 or T+0 cycle. We’re very happy to be aligned with the industry on the decision to move toward T+2.

What do you see as the key benefits to the DTCC, its clients, as well as wider industry infrastructures and end users?

The key benefits for everyone are ultimately driven by the reduction in risk from taking that extra day out of the process. A good example of this is the impact of shorting the settlement cycle on the US clearinghouse (NSCC). A shorter settlement cycle means fewer trades for the clearinghouse to guarantee which results in reduced margin requirements for clearinghouse members. A reduction in clearinghouse margin requirements benefits both the clearinghouse and its members. Another important benefit is the ability to harmonize with a number of other global markets that have already moved, or are looking to move, to T+2. In our increasingly borderless and integrated global markets, industry participants often find themselves moving investments across markets and between markets. Harmonizing settlement cycles reduces the risk and cost of investing globally and improves the safety and soundness in capital markets around the world.

With just under a year to go until implementation, what does the testing framework and roadmap look like?

The September 2017 implementation timeline includes a robust industry-wide testing plan to ensure firms have the adequate resources and infrastructure in place to mitigate operational and implementation risk. The number of firms making changes to support the move to T+2 – and the magnitude of the changes –highlights the need for comprehensive and well-coordinated industry testing and an implementation plan to confirm readiness and ensure success.

As part of the testing effort, DTCC, with the help of the Industry T+2 Testing Group, developed two testing documents. The first testing document, published in March of 2016, provided a high-level overview of how the test will be conducted. The second document, published in July of 2016, provided a more detailed description of the testing facilities, including instructions for accessing the testing systems and suggested testing scenarios. Beginning next year, DTCC will coordinate an industry-wide test that will cover all changes with respect to the implementation, and test all the different scenarios. We want to make sure we’ve covered all our bases, so to speak, in advance of the implementation date.

Is the industry steering committee concerned about firms meeting the implementation deadline?

There is always some concern with an industry-wide initiative that one or a few firms will not be on board with the changes in time, but we’ve done a lot of work to make sure that all parties have been involved. By collaborating with the Industry Steering Committee, industry associations and other similar groups, we’ve believe we’ve done a good job of communicating expectations.

Deloitte has been brought in as an independent party to run our Industry Command Center, which will be made-up of key industry members including many of the members of the Industry Steering Committee. The Command Center will be responsible for coordinating industry-wide implementation tasks and will be instrumental in determining the industry’s readiness for go-live next September. With the project now moving into the testing phase, clients seem to be on-track to meet the industry-determined implementation date. We’re confident that with the continued participation from the industry and market participants, we will successfully meet the September 5, 2017 deadline.

Looking ahead to the future, what is your view on accelerated settlement of T+1 and T+0?

As we get closer to the move to T+2, people naturally begin talking about further shorting the settlement cycle – moving to T+1 or even T+0. Many in the industry cite some of the new technology as the solution to the issues that prevent us from moving to T+1 or T+0. While these new technologies may find a role in post trades processing, it is unlikely they will be the “silver bullet” for a continued shorting of the settlement cycle since most of the current obstacles related to shorting the cycle are related to processing conventions not technology limitations. We’re still very supportive of moving the industry as a whole to the T+2 cycle; however, what many in the industry don’t realize is that those capabilities exist today at DTCC. Much of the core trading, clearing and settlement processes already support T+1 and T+0, and we allow our clients to settle transactions shorter than T+2, if that’s what they choose.

This article first appeared in the September 2016 issue of FOCUS, published by the World Federation of Exchanges.