The settlement date for stocks used to be T+5, or five business days after the transaction date, before moving to T+3, and now most markets operate on a T+2 settlement cycle. But panellists at the AFME conference discussed whether or not the T+2 cycle is enough.
Now at T+2, the natural progression would seemingly be for the industry to work its way down to T+1 and then to T+0.
The Depository Trust & Clearing Corporation (DTCC) has collaborated with the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI) to accelerate the move of the US securities settlement cycle to T+1.
The organisations believe changing T+2 to T+1 will benefit investors and market participant firms by reducing systemic and operational risks.
During the panel discussion, Robert Cavallo, director clearance and settlement product management, DTCC, said: “The committee, which is comprised of DTCC, SIFMA, ICI, and Deloitte, are in the process of putting the finishing touches on ‘the executive summary’, which will be distributed to the industry shortly — hopefully within the next three weeks.”
“Recommendations around the timeline for a move to T+1 will feature in the summary; somewhere around Q4 2023/Q1 2024 would be ideal for go-live. In order to achieve this targeted implementation date, successful completion of broad and comprehensive industry-wide testing will need to occur. The testing is vital to ensuring T+1’s success,” affirmed Cavallo.
ICI has identified critical milestones related to the regulatory changes necessary to affect the move to T+1. These timelines are subject to some slight change, but by Q1 2022 the regulators are set to publish proposed rule changes, and by Q4 2022/Q1 2023, the regulators are set to publish final rule changes and implementation dates.
Discussing the drivers for this move, Cavallo suggested that given the pandemic related market volatility that started in March 2020, and other occasions since then [such as the Robinhood saga], market participants are looking for ways to increase efficiency, reduce risk, and lower costs. ICI has concluded that the best way to achieve this would be to shorten the settlement cycle.
According to Cavallo, T+1 will deliver significant benefits to markets and investors as it will lower margin requirements, improve capital liquidity and reduce risk while maintaining the efficiency and resiliency that makes the capital markets run on a daily basis. He added: “And it does set the stage for bringing the industry closer to a T+0 settlement cycle.”
From the perspective of the buy-side community, Terri Van Praagh, chief operating officer, global fund services UK, Northern Trust, noted: “For the US domestic market for buy-side, the move to T+1 is a welcome way of addressing counterparty risk. The potential reduction of balance sheet requirements is probably the most attractive part of the move for the buy-side.”
However, Praagh highlighted that there is not a clamour of clients looking for reduced settlement cycles, and it is not a big driver for the buy-side as they tend to use their own settlement cycles.
She explained: “We tend to find that the market flurry in the frenzy around settlement cycles comes from the market side who can already cope with quicker processes. They've reaped the benefits from those processes without any complexities of third parties that get involved like we do on the buy side, as we have to involve custodians and underlying clients.”
Moving to the perspective of the market side, Sachin Mohindra, executive director, Goldman Sachs, cited: “The immediate micro benefits would be the reduction in counterparty risk, and cost and capital reductions on the back of that. Not all clients are impacted by that market reduction especially when it comes to clearing margin.”
Mohindra continued: “From a macro view, however, having quicker and more efficient processes can only be a good thing for the market as a whole.”
Later during the session, moderator Peter Tomlinson, director, post-trade, AFME, asked panellists if Europe should follow suit in the move to T+1.
Pierre Davoust, head of central securities depositories, Euronext, affirmed: “The volatility trigger of the US project has been seen in Europe as well. However, the market structure trigger that led to the retail brokerage industry development is less strong in Europe than it is in the US.”
According to Davoust, the pressure in Europe to follow the same path as the US is less concrete. He said: “We have discussed that there would be a clear benefit for the industry to move to this new structure but the trigger is less apparent than it is in the US.”
Additionally, Davoust highlighted that there are specificities in Europe, such as timing. He noted: “Europe is focused on the Settlement Discipline Regime (SDR) right now, and the last piece of this is regulation that will enter into force in February 2022. All of our efforts and investments are focused on getting that right."
He commented: “SDR aims to improve settlement efficiency in Europe, and I'm sure that most of our institutions will be focused on drawing upon the lessons from SDR in order to minimise the number of penalties. It means that over the next couple of months Europe will be focused on getting that right, which leaves less bandwidth to think about T+1.”
Another specificity of Europe, explained Davoust, is that there is not just one central securities depository (CSD). He elaborated: “We have many CSDs in Europe, so beyond all the challenges of moving to T+1, we have the additional challenge of friction, which is created when you want to settle securities across multiple CSDs.”
He concluded: “So to summarise, I think T+1 has clear benefits for the market. I believe Europe will get there at some point but I think it is unlikely we will collectively trigger the move to T+1 now because of the timing element of the settlement. Additionally, we have to sort out this tricky question about the future structure of European CSDs.”
Click here to read more about industry participants’ views on the move from T+2 to T+1.
