Skip to main content

by Bari Trontz

Related Information

Since T+5

With the industry focused on new ways to mitigate risks in the financial system, DTCC, with guidance from the Securities Industry and Financial Markets Association (SIFMA), is overseeing an effort to conduct an analysis on the issue of “time” – and its impact on risk in the settlement cycle for U.S. equity (plus municipal and corporate bond) trades. Currently, these trades settle three days after they are executed or, in industry parlance, on T+3.

“It’s clear that certain risks are prolonged by the cycle time between the trade execution and the related settlement,” said Michael Bodson, DTCC’s COO. “The compression of that timeframe would reduce risk and enable NSCC to lower its liquidity and collateral requirements, but getting there would require the industry to change its processes. So any discussion of shortening the cycle requires a thorough cost-benefit assessment.”

DTCC, with SIFMA’s guidance, will manage that analysis. In collaboration with the industry, the company will supervise a request-for-proposal process to select an independent consultant to conduct a comprehensive, balanced study.

The study will analyze three scenarios: shortening the equity settlement cycle to T+2, T+1 or T+0 . It will also define the process efficiencies that are necessary to reach a shortened settlement cycle, which should help further reduce costs across the industry.

“This initiative touches on three critical – and overlapping – concerns facing the industry: reducing risk; reducing capital and liquidity requirements; and reducing costs by streamlining processes,” Bodson said.

Benefits of accelerated settlement

In December 2011, DTCC presented to SIFMA a preliminary analysis of shortening the settlement cycle that was well received.

The potential benefits of a shorter cycle could include lower costs, greater trade processing efficiency and reduced risk for the U.S. financial markets. Specifically, an accelerated settlement cycle could reduce institutional trade exposure; risks in the clearinghouse (reflected in NSCC’s Clearing Fund requirements); and risks related to central counterparty liquidity requirements.

“DTCC is committed to working with the industry to conduct a robust examination of the opportunities and challenges presented by a shortened settlement cycle,” said Bodson. Emphasizing that DTCC is not pre-disposed to a specific outcome, he added, “The research will enable us to identify the obstacles and processes that would need to change in order to accelerate settlement and, during all phases of this project, we will collaborate closely with SIFMA to ensure industry concerns and ideas are recognized and addressed. The results of this study will be used to determine whether the industry should accelerate settlement or stay at a T+3 settlement cycle.” @