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December 1, 2012

CQ&D Cover Story: Faster Is Better

Study says industry wants faster clearing standards.

By Gregory Bresiger

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The securities industry now appears ready to jettison the T+3 clearing cycle.

At least, that's what one can conclude after a recent study by the Boston Consulting Group, authorized by the Depository Trust & Clearing Corp. and the Securities Industry and Financial Markets Association. It found most respondents support faster clearing standards. The study reviewed the costs and benefits of revising the industry's current T+3 standard , which requires clearing of transactions within three days after the trade takes place. The costs of an accelerated clearing standard would run in the hundreds of millions to more than a billion dollars for the industry as a whole. Among the new options considered were a T+2 or T+1 clearing standard.

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BCG officials, surveying industry players about speeding up clearing and settlement rules, found widespread support for faster settlements as a way of reducing counterparty risk.

"Our initial industry outreach shows that 68 percent of participants favor a shorter cycle," said the study, "Cost Benefit Analysis of Shortening the Settlement Cycle."

The study outlined three different scenarios: moving to T+2, T+1 or T+0, which amounts to same-day settlement. Risk reduction was the primary reason two-thirds of respondents backed a shorter cycle.

The debate comes at a time when many trading participants worry about what could happen to transactions in the next market meltdown or if a counterparty failed. The American securities industry, some industry players say, is ready for T+2 because many of the other advanced markets around the world are already at that point or heading there.

For instance, Hong Kong and Germany are already on a T+2 standard. And the rest of the European Union is slated to go to T+2 in 2014, say DTCC officials.

"Buyside firms and custodians with a significant amount of cross-border activity mentioned the benefits of improved international harmonization with T+2," said the study.

Still, this discussion about faster clearing in American markets has come up before and died. DTCC, as the clearing industry's utility, has repeatedly said it is "neutral" on what the industry standards are. But DTCC officials agreed the current industry T+3 standard needs to be discussed.

Michael Bodson, DTCC

"With a strong focus on risk reduction and capital optimization, DTCC, along with the financial services industry, believes it's an opportune time to examine the benefits of an accelerated trade settlement cycle," said DTCC president and CEO Michael Bodson.