DTCC and Boston Consulting Group explore US settlement switch
The Depository Trust &
Clearing Corporation (DTCC) has selected the Boston Consulting Group (BCG) to
conduct a business case study for reducing the current T+3 settlement cycle for
equities and certain debt securities in the United States.
DTCC proposed the study last
December. BCG will identify the costs and logistics involved in shortening the
settlement cycle to T+2, T+1 or T+0 compared to leaving it on the current
US broker trade body the Securities
Industry and Financial Markets Association (SIFMA) will work with BCG on the
study, providing access to the firm to market participants and subject matter
experts. BCG will interview or survey a cross-section of specialists, including
technology and operations staff, at around 200 firms throughout the securities
industry, DTCC says.
The 18-week study is expected
to be completed in mid-September.
“It’s clear that certain risks
and costs are prolonged by the time between the execution of a trade and its
related settlement,” said Michael Bodson, DTCC’s president and CEO-elect.
“Compressing that timeframe should reduce those costs and risks. To determine
how the industry might be able to shorten the time frame, shrink the related
costs and risks and determine other benefits and impacts is the purpose of this
business case study.”
The value of all U.S. equity,
corporate and municipal bond and UIT trades, which are settled on T+3, averaged
nearly $450 billion per day in 2011. National Securities Clearing Corporation
(NSCC), a subsidiary of DTCC, functions as the central counterparty to both
sides of these securities transactions in the US market.
The settlement cycle was
reduced from T+5 to the current T+3 in 1995 following enhancements in
Industry bodies in the US
twice looked at reducing the cycle since then – once in 2000 by the Securities
Industry Association (SIA, the predecessor to SIFMA) and again in 2004 by the
Securities and Exchange Commission – but both times it was decided that the
industry was not yet automated enough for a shorter cycle.
DTCC says interest in a
shorter cycle picked up after a European Commission group reported in February
2011 a need for a harmonised cycle in the EU. In the European Commission’s draft central
securities depository legislation released in March, the body called
for a harmonised settlement cycle across Europe of T+2. Most European markets
settle on T+3, with the biggest exception being Germany, which settles on T+2.
Settlement cycles vary in other markets and regions around the world.
DTCC says it does not favor
any particular outcome, whether keeping T+3 or shortening the cycle, but
instead will collaborate with BCG and SIFMA to gauge the industry’s opinion on a
Reporting by Christopher Gohlke, Global Custodian, an Asset International publication.