In a recent article information technology consultant Computer Sciences Corporation (CSC) suggests that the challenges of moving to same day from next day settlement are largely identical. US equity markets currently work with a three-day settlement cycle (T+3) between the day a trade is initiated and the day on which money/securities actually change hands.
CSC notes that in the current three-day settlement cycle, transactions from September 6, September 7 and September 10 were scheduled to have settled within three business days – including September 11. The subsequent disruption in US markets following the terrorist attack subjected investors – including pension funds – to settlement risk.
Settlement risk is the financial exposure when securities and cash are not exchanged between buyers and sellers.
Incomplete or unsettled transactions negatively impact the cash flow of financial institutions and damage the efficiency of the marketplace. Additionally, some US firms, notably the Bank of New York, were reported to have experienced difficulty settling the large volume of transactions once trading resumed.
T+1 And Counting
According to the Securities Industry Association (SIA) estimates, moving to T+1 could conservatively generate approximately $2.7 billion in pre-tax, annual net benefits for the industry, compared with an $8 billion price tag to ready for the switch. More than half the benefits would be realized in the back-end of the clearing and settlement cycle as a result of improvements in settlement activities, according to the SIA.
Following the move to T+3 in 1995, the US securities industry has been actively planning for the move to next day settlement, or T+1. Citing a T+1 Business Case published by the Securities Industry Association ( http://www.sia.com/t_plus_one_issue/pdf/BusinessCaseFinal.pdf , pg. 4-5), CSC notes the following foundation steps required to move to T+1:
– Modify internal processes to ensure compliance with
compressed settlement guidelines.
– Identify and comply with accelerated deadlines for submission of trades to the clearing and trading systems.
– Amend DTCC’s trade guarantee process to provide guarantee on trade date.
– Report trades to Clearing Corporation in locked-in format and revise clearing corporation’s output.
– Rewrite Continuous Net Settlement (CNS) to enhance speed and efficiency.
– Reduce reliance on checks, and use alternative means of payment.
– Immobilize shares prior to conducting transactions.
– Revise the prospectus delivery rules and procedures for IPOs.
– Develop industry matching utilities and linkages for all asset classes.
– Standardize reference data and move to standardized industry protocols.
CSC says that, with much of the preparations underway for a move to T+1, it would be just as easy to go all the way to T+0.
SIA T+1 Industry Reports at http://www.sia.com/t_plus_one_issue/html/t1_industry_reports.html .
T+1 Issues and Key Milestones at http://www.sia.com/t_plus_one_issue/pdf/Key_Milestones___Building_Blocks_as_of_081601.PDF
The T+1 Business Case at http://www.sia.com/t_plus_one_issue/pdf/BusinessCaseFinal.pdf
« Higher Limits, Catch-ups Directly Benefit Few: GAO Report