Shortening the settlement cycle

A report issued by the Securities Industry and Financial Markets Association (SIFMA), the Depository Trust & Clearing Corporation (DTCC) and the Investment Company Institute (ICI) states that US securities are likely to move from trade date plus two days (T+2) to trade date plus one day (T+1) during the first half of 2024.

The report by the three participating organisations, Accelerating the US Securities Settlement Cycle to T+1, provides market participants with a roadmap for managing the transition. It states that the timeline provides market participants with sufficient time to make an assessment of the changes that will be involved and conduct testing for a successful transition from T+2 to T+1 settlement. The three organisations are also confident that the SEC will have sufficient time to implement the necessary amendments to the regulatory framework.

The organisations responsible for the report note that ongoing discussions with the industry have seen consensus emerge that the move to T+1 settlement will deliver significant cost savings, reduced market risk and lower margin requirements, particularly during times of high volatility and stressed markets. The US moved from T+3 to T+2 in 2017, later than Australia, which made the move in 2016. The move to T+2 in Australia reduced daily cash margins by 25% to 30%.

The three organisations also recognise the role that the report’s roadmap plays in facilitating a collaborative effort from market participants across the industry to ensure the success of the transition to accelerated settlement.

Extensive industry engagement in 2020 to map out the potential risks and impacts was the foundation of the report. The DTCC issued a white paper in February 2021 setting out the benefits of shortening the settlement cycle and in April this year Deloitte & Touche LLP was commissioned to lead the working group sessions for dedicated industry engagement. More than 800 participants from 160 organisations were involved, including buy-side and sell-side firms, custodians, vendors and clearing houses. An Industry Steering Committee oversaw the process and report.

The report recommends that market participants commence working with their counterparties, custodians, vendors, regulators, and clients in light of the significant changes that need to take place to trade financing, technology infrastructure, and operational processes. There is recognition that compressing the trade settlement cycle from two days to one day requires overnight affirmation, which leaves little time for manual operations.

Canada will align with the US and move to T+1 at the same time. All exchanges in India have announced that they will implement the T+1 settlement cycle from February 25, 2022.

The ASX advises that it will maintain T+2 as the default settlement period in the replacement of CHESS, with settlement optionality deferred to after the CHESS Replacement project goes live. Consultation on CHESS Replacement noted that the new system will have the capability to offer customers shorter settlement periods. Market participants could be offered the ability to choose to settle their trades intraday, end of trade date or T+1. Feedback was sought from the industry and discussions will continue.

This article is general information only.