Free Site Registration

For T+2, It’s All Systems Go

Traders Magazine Online News, April 14, 2017

Michael Bodson, Kenneth Bentsen and Paul Schott Stevens

US market participants and investors have reason to cheer, as the Securities and Exchange Commission (SEC) adopted a rule last month that clears a path for financial transactions to settle faster—the first such change in more than 20 years.

Ken Bentsen

The rule advances a vital initiative—launched and led by the financial services industry—to shorten the settlement cycle for US stocks, most bonds, and unit investment trusts from trade date plus three days (T+3) to trade date plus two (T+2). When it goes into effect on September 5, 2017, the initiative will mark one of the most significant steps to strengthen the capital markets since the financial crisis in 2008.

Moving to T+2 will carve a great deal of risk out of US capital markets. By eliminating a day from the trading process, it will reduce the risk that counterparties or intermediaries will fail to live up to their settlement obligations.

Another anticipated benefit of moving to T+2 is the settlement efficiencies it will produce. Institutional investors, for example, will further strengthen their operational processes, resulting in more trades settled on time and fewer failed trades. Most trade allocations and confirmations will proceed on the day a trade is executed, leaving more time to identify and correct any errors in the terms of a trade. Given the lower levels of risk associated with a shorter settlement cycle, The Depository Trust & Clearing Corporation (DTCC) estimates it will reduce the daily average capital requirements for its equity clearing fund by 25 percent, or $1.36 billion.

Mike Bodson

But that’s not all. Mutual funds—one of the main vehicles that retail investors use to trade securities—will be able to manage cash flows more efficiently because the settlement cycle of their shares (typically T+1) will edge closer to that of their portfolio securities.

So, why not just push the system to next-day or same-day settlement—T+1 or T+0—right now? The answer is that T+2 aligns the United States with dozens of major markets around the world, including nearly every country in Europe and key jurisdictions in Asia, such as Australia, Hong Kong, and South Korea. It also aligns with Canada and Mexico, economies linked closely with the United States that are also moving to T+2 this September. T+2 generally works within systems and procedures already in place, and it will be ready for prime time in a matter of months.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.