Money managers largely seem to approve of the T+2 settlement cycle approved in September.
T+2 refers to the payment timing following a security purchase. Payment and the security's certificate must change hands no later than two business days after the trade is executed.
“Foresight, leadership, and collaboration in the financial industry have resulted in the transformational move to T+2,” said Marty Burns, chief industry operations officer at the Washington, D.C.-based Investment Company Institute.
“Market participants are pleased with the strong support of regulators in achieving this goal, but it is worth noting that the industry initiative toward a shorter settlement cycle took root and progressed without regulatory mandates,” he said.
The “most significant value” of T+2 is its effect of reducing settlement risks and enhancing market resiliency for stakeholders and, most importantly, investors, Burns added.
Six months later, the transition to a T+2 settlement date has triggered about 25 percent, or $1.36 billion, worth of savings in capital requirements for trade settlements, according to Depository Trust & Clearing Corp.
T+1: Sooner Rather Than Later?
One bite out of the apple doesn’t seem to be enough, as investment professionals and clients alike are looking to cut the trade settlement cycle from two days to one day, or better yet, instantaneously.
What are the prospects of faster T+1 settlement dates and how will Wall Street decision makers go about such a change. More importantly, when can advisors and their clients expect a shift in settlement dates?
Maybe sooner rather than later to answer the latter question.
“Moving to shorten the U.S. settlement cycle to T+2 was an historic achievement that will deliver significant benefits to market participants,” said Murray Pozmanter, managing director at The Depository Trust, in a new white paper entitled “Modernizing the U.S. Equity Markets Post-Trade Infrastructure.”
However, there’s more work to do, he added. On average, more than $5 billion is still held in margin to manage counterparty default risk in the system.
In addition, DTCC’s subsidiary, National Securities Clearing Corp. (NSCC), requires additional liquidity resources for peak settlement days, further adding costs and risks to U.S. markets, Pozmanter said.
“We believe the opportunity exists to modernize the settlement system to achieve additional operational and capital efficiencies by further accelerating the settlement cycle and optimizing the settlement process,” he explained.
The process of optimizing and accelerating settlement is already underway at DTCC.
“The time for this idea has absolutely come, because we already do settle trades on T+1 (even T+0),” said Mike McClain, managing director and general manager of equity clearing at DTCC. “It’s really just time to make it act, than to rely on a post-trade bilateral agreement.”
'A Shorter Cycle'
The easiest way to make it happen would be to have a trading venue provide a platform through which all securities traded are designated for T+1 settlement.
“We’re in talks with a couple of alternative trading systems about just such a platform now,” McClain said. “This allows all those market participants capable of handling T+1 settlement to take advantage of a shorter cycle without a full-scale industry change.”
DTCC is also looking at optimizing settlement by working with the industry to ensure a greater portion of trades are processed overnight, promoting settlement finality in time for a morning settlement. That cuts one day from the risk of a transaction.
“When combined with a T+1 settlement, this could result in essentially a T+.5 settlement,” McClain said.
Consequently, the industry is “ready to go” to a next-day settlement cycle, the DTCC said in its white paper.
“Participants are hungry for complete transparency into trade flows across sell side and institutional activity and DTCC is proposing to feed this widespread need through new shortened settlement options,” the organization said, “including accelerated time to settlement and settlement optimization.”
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]
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