The T+2 Industry Steering Committee (T+2 ISC) has released a white paper setting out the timeline and activities required to move to a two-day settlement cycle (T+2) in the US by the end of Q3 2017.
The T+2 ISC, organised by The Depository Trust & Clearing Corporation (DTCC) and made up of members from across the securities industry, including the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), was formed to provide oversight and guidance on the US move to a shorter settlement cycle.
Shortening the US settlement cycle for equities, corporate and municipal bonds, and unit investment trust (UIT) trades from the current three-day settlement cycle, or T+3, to T+2 is expected to deliver a number of benefits, including reducing operational, systemic and counterparty risk, lowering liquidity needs, and limiting procyclicality, while aligning the US with other T+2 settlement markets across the globe. A shorter settlement cycle will enhance US market structure, improving safety and efficiency for investors.
Michael Bodson, president and CEO at DTCC said the announcement is a critical step forward in shortening the settlement cycle and harmonising the US with other major markets globally. He added that it will strengthen the financial system by reducing risk and creating greater operational efficiencies. DTCC will continue to work collaboratively with the T+2 ISC and other industry partners to offer guidance and support as this important initiative moves forward, he says.
The proposed implementation timeline was recommended by the T+2 ISC after thorough input from more than 600 industry participants across 12 market segments. The move is contingent upon obtaining regulators’ support to amend applicable rules in a timely manner, and upon successfully completing industry-wide testing during Q2 and Q3 2017. SIFMA and ICI, co-chairs of the T+2 ISC, have recently submitted a letter to regulators outlining specific regulatory changes needed to facilitate the move.
Said Tom Price, co-chair of the T+2 ISC, and managing director, operations, technology & business continuity planning, Securities Industry & Financial Markets Association (SIFMA): “After rigorous analysis, the T+2 ISC determined that a move to a T+2 settlement cycle is achievable by the end of Q3 2017. The move to T+2 will yield critical and immediate efficiencies that will help mitigate operational risk and keep the US competitive with global markets. The establishment of this timeline is a critically important step toward T+2, and much work remains to be done. Continued communication, socialization and transparency with the broader industry and regulators will be essential to making T+2 a reality.”
In addition to the timeline, the white paper includes industry-level requirements, considerations, leading practices and other initiatives that organizations will need to assess. Some key industry requirements include:
Reference data and trade processing systems must be configured for T+2 as standard settlement
Fixed-income and unit investment trust trades matched in Real Time Trade Matching (RTTM) must be matched by 11:30 a.m. EST on T+2
Institutional equity trades must be affirmed by 12 p.m. EST on T+1 for straight-through processing
Processing of physical securities must align with T+2 settlement timeframes
Market participants will also have to consider how the shortened settlement cycle will impact resolution of failed trades, as well as securities lending, liquidity and collateral management, multi-listed securities processing, foreign investment/cross-border transactions and secondary insurance for municipal bonds.
“Reducing the settlement cycle will give investors a greater sense of confidence in the US markets and enable quicker access to funds following trade execution. The timeline shared by the ISC is achievable, but it’s important that organizations begin preparing as we approach the next phase of the T+2 migration.” said Kathleen Joaquin, co-chair of the ISC and Chief Industry Operations Officer, Investment Company Institute (ICI).
Next Steps
Now that a timeline has been communicated, the T+2 ISC will focus on regulatory outreach, communication, planning and industry-wide testing. The T+2 ISC will continue to drive the initiative, with DTCC providing project management support throughout the T+2 migration.
Pending this regulatory action – targeted by the end of Q2 2016 – specific “go-live” dates will be determined and shared with the industry. However, market participants should prepare for industry-wide testing to begin by the end of Q1 2017.
David Pearson, head of post-trade strategy at Fidessa, commented: "It is good to see that the US markets are now set on the journey to T+2. Some people have already asked, “why so long?”, but a 30-month timeframe will give market participants enough time to identify and resolve all those business processes that will need to be updated or automated. No one wants this one rushed."
