Mission not yet accomplished.
The drive to get settlement times down to the much- vaunted T+1 cycle has yet to be achieved despite advances in technology and a pressing need to streamline and speed up the settlement cycle. When Traders Magazine reported on the issue back in June 2013. Back then the move to T+1 was expected to take place in 2020.
Are we still on track with just six months to go?
Or can we leapfrog to T+0?
With the advent of newer technologies, such as blockchain, quantum computing, cloud-based services, etc, T+1 shouldve been reached already. Shouldnt it have?
Spencer Mindlin, capital markets analyst at Aite Group recalled the benefits of a shorter cycle – counterparty risk mitigation, lower margin requirements, improved market liquidity, and global standardization. Despite this, he doesnt expect much in the next few months.
The shift to T+2 was a welcomed improvement to the resiliency of the US markets and, frankly, long overdue. Still, I dont expect well see yet another shift again to an even shorter cycle, like T+1 or T+0, in the foreseeable future, Mindlin told Traders Magazine. The industry is unlikely to take the initiative right now and push for such a change.
He did add that there are many SEC-backed pilots going on right now and they might delay any change to clearing cycle for fear of interfering with their outcome. And there is cost to think about.
While its true that T+2 forced the industry to figure out how to get such a change done and laid a path for future collaboration and coordination, the challenges and costs to the industry would be considerable, Mindlin continued. All that, combined with general resistance to change might push this move more than a few years off.
A few years? Yes, he said.
Another shift would again require the SEC to provide leadership and rulemaking, which I think is unlikely right now given everything on its plate. In fact, I think the question about what sorts of technological innovation might be required to enable a shift towards T+1 or T+0 points at yet another reason why the industry is unlikely attempt a shift at this time, Mindlin said.
First, distributed ledger technology is still, relatively speaking, still early and the space is maturing. DLT solutions will undoubtedly be sought for answers to questions about how the industry will cost-effectively shorten the settlement cycle again while future-proofing the industrys infrastructure, he explained.
I think the industry and Commission will sit in wait-and-see mode until DLT matures, standards are adopted, and the number of providers consolidates, Mindlin said. Only then will they will feel confident and ready to accomplish another industry change to settlement cycles.
Greenwich Associates agreed. In their latest white paper, Steampunk Settlement: Deploying Futuristic Technology to Achieve an Anachronistic Result, they discuss the medieval results that come from the expensive deployment of futuristic technology, and challenge the idea that DLT could replace todays clearance and settlement infrastructure.
DLT has great potential to enhance the existing system, said Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of the paper. But in reality, the technology is evolutionary, not revolutionary, and attempting to replace the clearing infrastructure with this technology is to carry the system not into the future, but into the past.
Some DLT enthusiasts argue that the new technology should replace, not enhance, the existing clearing system. They contend that cryptographically enforced contracts can make secure settlement instantaneous and default impossible, thus avoiding the need for posting collateral and the existing system altogether.
Yet by any measure, Monahan said the existing system is extraordinarily efficient. While its true that this efficiency would not be wiped out entirely with a real-time gross settlement associated with DLT, it is not an exaggeration to say that it would save billions of dollars in reserve funds at the cost of requiring hundreds of billions in prefunding, creating a burden on money markets that participants have spent over a century developing systems to alleviate.
This is precisely the lesson the Venetian Senate learned in 1584 in a strikingly similar way, he said. By substituting a payment system for a credit system, they sucked liquidity out of the economy. Unlike the Venetians, who really did blaze a new path, we have the benefit of learning from history, and this is its lesson: DLT has a big role to play in improving the quality of the settlement infrastructure, but it cannot replace it entirely without imposing the very costs it was designed to reduce.
The following article originally appeared in the June 2013 edition of Traders Magazine
Going to T+1 Possibly on the Horizon
By Staff Reports
The clearing industry’s move to speed up the settlement cycle would “reduce systemic risk and the risk of failure of institutional trades on the buyside,” said eClerx’s Alan Paris.
Industry utility the Depository Trust & Clearing Corp., announcing the results of a recent poll, said the clearing industry will be ready for a T+2 cycle by 2016 and T+1 by 2020. Paris, a financial services principal at the outsourcing service provider, says brokerages, bankers and other industry players are ready for a faster settlement cycles.
“Every financial institution I talk tells that me they’re ready for it,” Paris said. So why, in a world in which most advanced markets are at T+2 or moving to it, hasn’t the clearing business moved to a faster cycle?
A recent DTCC study found that players retain certain manual techniques. Investment bankers are ready for T+2. However, Paris said, some problems persist on the buyside. The potential problem is with asset managers and hedge funds. “They are less fully automated as far as the trade cycle is concerned.”
An increased number of failed trades and other problems will likely be the result of a faster settlement cycle for these buysiders, he said. They will have “growing pains,” Paris said.
The trading industry considered going to a T+2 standard more than a decade ago, but the terrorist attacks of 2001 put that on the back burner.
Paris and other industry experts also believe that the movement for a faster settlement cycle has been stymied by an emphasis on straight-through processing. Straight-through processing enables the entire trade process to be conducted electronically without any manual intervention. The concept has been used in sectors such as banking and financial planning.
DTCC members have said they were ready to go to a faster settlement cycle. DTCC, which could ask the Securities and Exchange Commission for the authority to junk the current T+3 equity settlement cycle in favor of a faster one, has conducted surveys detailing the costs and the eventual savings of a T+2 cycle. DTCC recently recommended that the U.S. move to a two-day settlement-T+2-cycle in 2016, and a T+1 cycle by 2020.
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