| NEW YORK, April 23
NEW YORK, April 23 The Depository Trust &
Clearing Corporation, which processes all U.S. stock and fixed
income trades, said on Wednesday it supports shortening the
settlement cycle for U.S. equities, corporate and municipal
bonds, and unit investment trust trades.
The settlement cycle, which refers to the time between when
a trade is made and the time that the buyer must make the
payment and the seller must deliver the security, would be
shortened two business days after the day of the trade (T+2)
from the current three business days after the trade (T+3).
The idea gained steam during the 2008-2009 global financial
crisis as a way for firms to limit the risk associated with the
person or firm on the other side of a trade defaulting.
"This is a very significant step in making the industry
safer and more reliable," Patrick Kirby, chief operations
officer of J.P. Morgan's corporate and investment bank
operations, said in a statement.
A shortened settlement cycle would allow funds to be freed
up faster for reinvestment while reducing credit and
counterparty exposure, the DTCC said. It would also mean less
increases in margin and liquidity needs when the markets become
volatile, and it would free up capital for broker-dealers by
reducing their clearing fund requirements.
"To the extent that you have the risk of your counterparty
on your books for three days after doing your trade, I think
that everybody agrees that shortening that by as much as
possible, and in this case, by a third, is worthwhile," Murray
Pozmanter, head of clearing agency services at DTCC, said in an
The DTCC, with guidance from the Securities Industry and
Financial Markets Association (SIFMA), a Wall Street trade
group, commissioned a study on the topic two years ago to weigh
the costs and benefits of moving to a T+2 settlement cycle, and
also to a T+1 time frame.
The costs to make the change would vary from firm to firm,
depending on the level of internal automation they already have,
but overall industry costs would be about $550 million to
implement T+2, the study by The Boston Consulting Group found.
It said the costs would be offset by operational savings in
about three years. Risk exposure on unguaranteed trades for
institutions would be reduced by up to $200 million.
A move to T+1 would have been around $1.8 billion, and would
be offset by operational savings in about 10 years, the study
said. Reduction in risk exposure would be up to $410 million.
Pozmanter said that the move to T+2 would take several
years, and that after that, a move to T+1 would likely be much
Working groups that include representation from all of the
industry associations that have weighed in on the project will
be formed in the next few weeks to decide whether to move
forward, and if so, they will set a time frame, he said.
The move has broad support from industry groups, including
SIFMA, the Investment Company Institute, the Association of
Global Custodians, and the Association of Institutional
The U.S. Securities and Exchange Commission has also
indicated it supports shortening the settlement cycle.
In 2013, DTCC's subsidiaries processed securities
transactions valued at around $1.6 quadrillion. Its depository
provides custody and asset servicing for securities issues from
139 countries and territories valued at $43 trillion.
(Reporting by John McCrank; Editing by Bernard Orr)