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Securities settlement has come a long way since the once-per-month system instituted by Napoleon in the early 1800s.
Just this week, the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) published a report targeting the first half of 2024 to shorten the U.S. securities settlement cycle from trade date plus two days, or T+2, to T+1.
In the Napoleonic era, settlement took place once per month on a fixed date, which presumably meant your trade settlement could be anywhere from T+1 to T+30. Traders Magazine has been around for a long time, but not that long, as there are no records of Traders articles about T+30 settlement.
Technology advanced, but it wasn’t until the 1970s and 1980s when settlement in the U.S. started to get whittled down — to T+7, then T+5, then T+3.
Back in 2013, with equity trade fails averaging around 10%, the debate was around moving from T+3 to T+2, a Traders Magazine article reported.
“After years of technology breakthroughs, it is now taking just milliseconds to trade, but improvements in settling a trade have not kept up. Given the potential of another financial crisis, that could pose settlement and operational risks,” the article stated. “…the industry is considering reducing the settlement cycle from three to two days. The T+3 standard has not changed since 1995. That’s when it was reduced from T+5.”
Flash forward to 2017, and the industry got the ball across the T+2 line. It was no mean feat, according to Michele Hillery, DTCC General Manager of Equity Clearing and DTC Settlement Service.
“As we saw during the move from T+3 to T+2 in 2017, accelerating the U.S. securities settlement system is a significant undertaking that requires industry-wide coordination and alignment,” Hillery told Traders Magazine on Dec. 2. “Market participants must consider the impact of T+1 and address firm-level changes and resourcing. In addition, comprehensive testing will need to be conducted, and regulatory changes will need to be implemented.”
Hillery added: “The industry has achieved consensus on moving to T+1, as it will deliver significant benefits by increasing the overall efficiency of the securities markets, reducing risk, creating better use of capital, and promoting financial stability.”
Clearly, given the indicated lead time of more than two years, moving to T+1 will be a heavy lift. When and if T+1 is reached, can settlement be compacted even further? Is real-time settlement feasible?
The answers to those questions seem to be not any time soon, and not really. Similar to a football offense driving down the field, the last few yards before the end zone are often the toughest to traverse.
“While the paper confirms that the industry achieved consensus around T+1, it also indicated that further shortening the settlement cycle is not feasible in the short term,” the SIFMA, ICI and DTCC release stated. “Moving beyond T+1 would require an extensive overhaul of current-day clearance and settlement infrastructure, changes to business models, revisions to regulatory frameworks, and potentially the implementation of real-time currency movements.”