Cutting U.S. trade settlement time to two days under study
NEW YORK — U.S. stock and bond investors would have their trades settled in two days instead of three under a proposal that Wall Street firms are reviewing.
Depository Trust & Clearing Corp. (DTCC), which processes all U.S. equity and fixed-income transactions, has asked for the Securities Industry and Financial Markets Association’s (SIFMA) endorsement of a shorter settlement cycle. Its approval would effectively start the process of implementing the proposal.
Nations around the world are cutting processing times to two days, giving investors faster access to cash when they sell stocks and bonds. A T+2 system, as the plan is known, would cost the industry about $550 million while enabling $170 million in annual savings, according to a Boston Consulting Group study. With quicker settlement, brokers on average will be able post 15 percent to 24 percent less capital for protection in the event of a DTCC member default, Boston Consulting Group said.
“Our preliminary position is that we think it makes sense to look to T+2 as an interim step, and once we’ve achieved it, then assess whether we need” one-day settlement, Neil Henderson, managing director of clearing services at DTCC, said in a phone interview. “We need to get some industry support for that position, or a contrary position, so we have reached out to SIFMA, which has become very involved of late.”
All European Union countries will settle trades in two days by the start of 2015. The U.K. will shift in October, Australia is studying such a move, and Russia fell in line with other nations by slowing to two days from same-day settlement. U.S. securities trades settled in five days until the 1990s.
Settlement refers to the amount of time between when a trade is executed and when the securities are delivered from one investor to another. Buyers must pay their broker within three days under the current system, while sellers must deliver securities within the same amount of time.
In the U.S., trades of stocks, corporate bonds and municipal securities generally settle within three days. Some securities are processed even faster, such as the one-day settlement for U.S. Treasuries.
Earlier this month, DTCC asked SIFMA whether two-day settlement could be implemented in the U.S. within three years, or whether it would take longer, according to Henderson.
“Shortening the settlement cycle is a very important issue for our membership which would involve significant structural change and cost, and SIFMA is reviewing it,” Katrina Cavalli, a SIFMA spokeswoman, said in an email. She declined to comment further. The organization represents securities firms, banks and money managers.
DTCC, whose subsidiaries settled about $1.6 quadrillion in securities transactions last year, commissioned Boston Consulting Group to examine settlement times last year. The firm delivered a report in October 2012 after talking to industry participants and modeling the costs and benefits. The study found that 68 percent of respondents were in favor of faster processing.
“There’s pretty broad consensus that shortening the settlement cycle reduces risk,” Elena Staloff, vice president of clearing strategy at DTCC, said in an interview. “But the biggest concerns are cost and timing. Right now, firms have to comply with a myriad of new regulations that are coming out.”
In addition to cost savings, the study suggested that counterparty risk in the financial system would be reduced by shifting to a shorter amount of time.
“The amount of outstanding trades, and correspondingly, the amount of collateralized or uncollateralized risk borne by industry participants, is proportional to the length of the settlement cycle,” BCG wrote. “Thus a shorter settlement cycle implies a reduction in risk across the industry.”