NEW YORK (Reuters) - 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 (JPM.N) 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 interview.
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 more economical.
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 Investors.
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