The Depository Trust & Clearing Corporation (DTCC) has selected the Boston Consulting Group (BCG) to conduct a business case study for reducing the current T+3 settlement cycle for equities and certain debt securities in the United States.
DTCC proposed the study last December. BCG will identify the costs and logistics involved in shortening the settlement cycle to T+2, T+1 or T+0 compared to leaving it on the current cycle.
US broker trade body the Securities Industry and Financial Markets Association (SIFMA) will work with BCG on the study, providing access to the firm to market participants and subject matter experts. BCG will interview or survey a cross-section of specialists, including technology and operations staff, at around 200 firms throughout the securities industry, DTCC says.
The 18-week study is expected to be completed in mid-September.
“It’s clear that certain risks and costs are prolonged by the time between the execution of a trade and its related settlement,” said Michael Bodson, DTCC’s president and CEO-elect. “Compressing that timeframe should reduce those costs and risks. To determine how the industry might be able to shorten the time frame, shrink the related costs and risks and determine other benefits and impacts is the purpose of this business case study.”
The value of all U.S. equity, corporate and municipal bond and UIT trades, which are settled on T+3, averaged nearly $450 billion per day in 2011. National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, functions as the central counterparty to both sides of these securities transactions in the US market.
The settlement cycle was reduced from T+5 to the current T+3 in 1995 following enhancements in automation.
Industry bodies in the US twice looked at reducing the cycle since then – once in 2000 by the Securities Industry Association (SIA, the predecessor to SIFMA) and again in 2004 by the Securities and Exchange Commission – but both times it was decided that the industry was not yet automated enough for a shorter cycle.
DTCC says interest in a shorter cycle picked up after a European Commission group reported in February 2011 a need for a harmonised cycle in the EU. In the European Commission’s draft central securities depository legislation released in March, the body called for a harmonised settlement cycle across Europe of T+2. Most European markets settle on T+3, with the biggest exception being Germany, which settles on T+2. Settlement cycles vary in other markets and regions around the world.
DTCC says it does not favor any particular outcome, whether keeping T+3 or shortening the cycle, but instead will collaborate with BCG and SIFMA to gauge the industry’s opinion on a switch.
Reporting by Christopher Gohlke, Global Custodian, an Asset International publication.