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.
By working closely with their members and other key stakeholders, the organisations are outlining key steps to shorten the cycle for secondary market transactions.
As part of this, DTCC says they are identifying priority issues that need to be addressed and conducting the necessary due diligence and resolution of these critical issues.
The groups began discussing shortening the settlement cycle with their members last year and aim to complete their analysis on the next steps to achieving T+1 by the end of Q3 2021.
Shortly after that work, the organisations will develop a definitive timeframe for moving to T+1.
In February, DTCC launched a two-year industry roadmap to shorten the settlement cycle for US equities to one business day. It was noted that a move to T+1 would not require large operational or technical changes by market participants.
Though SIFMA, ICI and DTCC are committed to pursuing this work vigorously, they explain there are many issues that must be considered before the organisations can determine an implementation date.
The organisations identified a series of goals to advance this effort, including mitigating risks to investors and industry participants; analysing and improving current business and operational processes; and minimising the disruption of important industry services.
They also aim to ensure new risks are not introduced and comprehensive cost-benefit analysis can be conducted.
Additionally, multiple regulatory bodies, including the Securities and Exchange Commission (SEC), will need to be engaged to bring this initiative to fruition.
SIFMA, ICI and DTCC are also set to assess what it may take to further accelerate the settlement cycle beyond T+1 and explore the role that emerging technologies could play.
However, a move beyond T+1 has had its critics. Industry expert and consultant Tony Freeman has previously emphasised that the idea of T+0 settlement is a non-starter and could have
“huge side effects and remove all of the benefits of netting which are significant”.
Michael C. Bodson, DTCC president and CEO, comments: “Recent volumes and volatility demonstrate that the time to move to a shorter settlement cycle is now. While we are committed to fast-tracking this work and can support T+1 with existing DTCC technology today, we realise that this is a complex undertaking that will require close collaboration across the industry.”
He continues: “We look forward to working closely with our colleagues, members, regulators and key stakeholders to achieve T+1 and ultimately delivering reduced risk and margin relief for the benefit of market participants and underlying investors.”
According to SIFMA president and CEO Kenneth E. Bentsen, Jr, a shorter settlement timeframe can benefit investors and market participants by reducing credit, market and liquidity risks and promoting financial stability.
“Our plan is to fully address the business and operational impacts of the change first, to ensure a smooth transition and avoid any unnecessary market risk,” he says.
“ICI and its members will play an active role in designing the roadmap for shortening the settlement time. Regulated funds occupy a prominent place at the intersection of trading and settlement as they are the primary source for the daily trading transactions that brokers process,” adds ICI President and CEO Eric J. Pan.
ICI, SIFMA and DTCC led the move to T+2 settlement in 2017, and Pan says they look forward to reviving that successful partnership.
Click here to discover more about the move to T+1.
