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by Bari Trontz

A recent study completed by the Boston Consulting Group (BCG) reports that shortening the time period between trade execution and settling payment for U.S. cash securities transactions could reduce the industry’s costs and risk exposure by several hundred million dollars annually. Commissioned by DTCC, with the guidance of the Securities Industry and Financial Markets Association (SIFMA), BCG completed an 18-week business case analysis of the impacts of shortening the trade settlement cycle in the U.S. financial markets for equities, corporate and municipal bonds and unit investment trust (UIT) trades. The purpose of the study was to examine three of the financial industry’s critical areas of concern: reducing risk, optimizing capital and reducing costs.

Next: industry feedback
Currently, the securities industry completes settlement for trades in equities and certain debt securities on the third day after a trade is executed. This three-day period is known as T+3. The results of the BCG study will be used to help the industry determine whether it should accelerate settlement or stay at T+3.

DTCC is not predisposed to a specific outcome and will drive discussions with the industry to determine if the significant benefits of a shortened settlement cycle outweigh the interim challenges such a change may present to market participants in order to come collectively to a recommendation.

“With a strong focus on risk reduction and capital optimization, DTCC, along with the financial services industry, believes it’s an opportune time to examine the potential benefits of an accelerated trade settlement cycle,” said Michael Bodson, DTCC’s President and CEO. “Over the coming months, DTCC will spearhead further outreach with all industry constituents to enlist feedback on the various scenarios the report outlines to determine next steps, if any, to be taken.”

Three scenarios
BCG’s report contains a comprehensive assessment of the costs, benefits and participant perspectives related to the industry moving to a shortened settlement cycle and provides analysis on three different scenarios: a move to T+2, T+1 and T+0.

BCG’s quantitative modeling of a shortened settlement cycle details the impact on required investments, annual operational cost savings, annual Clearing Fund reductions and the reduction in risk exposure on unguaranteed buyside trades. T+0 was determined infeasible for the industry to accomplish at this time due to the scope of changes required to achieve it.

Payback period on investments
“Our findings show that while shortening the settlement cycle will involve upfront investments, our assessment indicates that the calculated payback period – across the industry based on operational cost savings – is approximately three years for the T+2 model and approximately 10 years for the T+1 model,” said Chandy Chandrashekhar, BCG Partner and Managing Director.

“Our initial industry outreach, prior to the results of the cost-benefit analysis, also shows that 68% of participants favor a shorter cycle and 27% of participants consider such a move a high priority for bringing greater efficiency and risk mitigation to the U.S. financial markets,” Chandrashekhar said. “Other constituents stated that competing priorities and regulatory initiatives represent a potential challenge to shortening the settlement cycle at this time.”

According to the BCG study, enablers to implementing T+2 include trade date matching, match to settle, a cross-industry settlement instruction solution, dematerialization of physical certificates, “access equals delivery” for all products and increased penalties for fails. T+1 can then be built on the foregoing but will also require building an infrastructure for near real-time processing, transforming securities lending and foreign buyer processes and accelerating retail funding.

BCG interviewed or surveyed market participants – including institutional and retail broker/dealers, buyside firms (asset managers, hedge funds and pension funds), registered investment advisors, custodian banks, transfer agents, service bureaus, exchanges and market utilities – at firms of various sizes across the financial services industry.”@

[Read BCG’s cost-benefit analysis in its entirety on]