Cross-Industry Analysis Examines Costs and Benefits of Shortening the Time Period between Trade Execution and Settlement Date
New York, October 4, 2012 – 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 The Depository Trust & Clearing Corporation (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.
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 (SSC) 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.”
BCG’s report contains a comprehensive assessment of the costs, benefits and participant perspectives related to the industry moving to a SSC and provides analysis on three different scenarios: a move to T+2, T+1 and T+0.
BCG’s quantitative modeling of a SSC details the impact on required investments, annual operational cost savings, annual Clearing Fund reductions, and the reduction in risk exposure on unguaranteed buy-side trades. T+0 was determined infeasible for the industry to accomplish at this time due to the scope of changes required to achieve it. A summary of the results of the costs and benefits of moving to T+2 or T+1 are as follows:
Source: Boston Consulting Group
“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 3 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. 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 physicals, “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, buy side 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.
BCG’s cost benefit analysis can be read in its entirety at CBA BCG Shortening the Settlement Cycle October 2012.
Through operating facilities and data centers around the world, DTCC and its subsidiary companies automate, centralize and standardize the post-trade processing of financial transactions for thousands of institutions worldwide. With more than 40 years of experience, DTCC is the premier post-trade infrastructure for the global financial markets, simplifying the complexities of clearance, settlement, asset servicing, global data management and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, derivatives, money market instruments, syndicated loans, mutual funds, alternative investment products, and insurance transactions. In 2011, DTCC processed securities transactions valued at approximately US$1.7 quadrillion. Its depository provides custody and asset servicing for securities issues from 122 countries and territories valued at US$39.5 trillion. DTCC’s global OTC derivatives trade repositories hold records on more than US$500 trillion in gross notional value on transactions across multiple asset classes globally. For more information, visit www.dtcc.com.