In order to move from T+2 to T+1, complete industry engagement is needed, according to Murray Pozmanter, head of clearing agency services and global business operations, DTCC.
Pozmanter’s comments were made during the 2021 Depository Trust & Clearing Corporation (DTCC) Forum where he discussed the challenges surrounding a move to T+1.
Back in February, DTCC launched a two-year industry roadmap to shorten the settlement cycle for US equities to one business day (T+1).
It has been suggested by DTCC that the immediate benefits of moving to a T+1 settlement cycle include cost savings, reduced market risk and lower margin requirements.
Three years ago the settlement convention was changed from T+3 to T+2, which Pozmanter said is a tremendous benefit as the work that was done previously can be leveraged now.
“This gives us a good starting point, and it gives the industry something that they can work off to determine what those challenges will be,” he affirmed.
However, there has been some industry concerns about moves towards T+1 and also T+0. Industry expert and consultant Tony Freeman recently noted: “T+1 has lots of fundamental issues that would need to be resolved as it does require quite a lot of process improvement. The cost of moving to T+1 is significantly higher.”
Pozmanter highlighted there are some challenges for firms that they'll have to overcome, including the need to manage other priorities.
“Changes to the existing settlement convention will require tremendous industry-wide testing, and there are a lot of other things going on in the industry that need to be balanced with this,” Pozmanter said.
During this discussion, Mike Bodson, president and CEO at DTCC, said: “I believe accelerating settlement should be right at the top of everyone's list.”
“How many times have we heard the question ‘If I can buy a book or computers or groceries online and have them delivered in a day then why does it take two days to clear a trade?’ Shortening the settlement cycle further will benefit investors, market participants and other stakeholders.”
Speakers discussed the unprecedented trading volumes and volatility from last year and noted that DTCC’s current netting system allowed all of the activity to settle seamlessly at the central clearing counterparty (NSCC) and at the depository (DTC).
On a typical trading day, NCC processes an average of $1.77 trillion in equities transactions a day. The netting process reduces that number by 98 per cent, hence the total value settled is only $37.7 billion.
Pozmanter commented: “While the current industry convention is for T+2 settlement it's important to note that NSCC and DTC can support T+1 and even T+0 settlement with current technology.”
According to Pozmanter, DTC is already a T+0 settlement platform. While the focus is on cash equity trading, there's money market activity and securities lending activity that comes into DTC and is settled the same day.
“We currently process in excess of one million T+0 transactions a day at our depository, DTC, and so while the industry convention is T+2, and while the benefits of netting are tremendous and must be preserved, it's important to understand the same-day capabilities already exist.”
Elsewhere in the industry, Vladimir Tenev, CEO of Robinhood, is pushing for the settlement infrastructure to be ‘modernised’.
Tenev suggested that solving the problem for the system will require “systemic change” and fixing of the “antiquated settlement structure”.
Meanwhile, Derek Coyle, custody product manager, vice president, Brown Brothers Harriman (BBH), has also noted that moving towards T+1 settlement is a topic of interest.“If we look at that over a medium-term view then CSDR is going to work towards moving towards faster settlement times as well as greater risk elimination, and that will be better for all of us,” he said.
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