DTCC pushes move to T+2 settlement for US markets
US clearing body the Depository Trust & Clearing Corporation is pushing a move to shorten the settlement cycle for the US markets to T+2, claiming support from industry bodies and firms including JP Morgan.
The DTCC outlines the rationale for shortening the cycle by a day in a white paper published today. The paper sets out the DTCC view that shortening the time period between trade execution and settling payment for US cash securities transactions “protects the financial markets by reducing credit and liquidity risks to both the industry and the individual investor”.
The proposal covers the US equities, corporate and municipal bonds and unit investment trust markets and follows a “robust due diligence process” that included risk studies and a cost-benefit analysis by the Boston Consulting Group.
“After a comprehensive assessment of the potential impact on market participants, it’s clear that time equals risk. A shortened settlement cycle will substantially reduce risk across the industry and for underlying investors,” said Michael Bodson, president and chief executive at DTCC. “As the industry is focused on mitigating operational and systemic risk and protecting the integrity of the US financial system, DTCC supports this critical step that will create greater certainty, safety and soundness in the capital markets.”
It gives three main arguments in favour of T+2:
- It will foster a reduction of risk by moving trades more quickly to settlement, enabling funds to be freed up faster for reinvestment and reducing credit and counterparty exposure.
- A shortened settlement cycle would reduce procyclical increases in margin and liquidity needs that can happen during times of volatility, exacerbating financial instability.
- a shortened cycle would further reduce the liquidity requirement of DTCC’s subsidiary, National Securities Clearing Corporation’s, freeing up capital for broker-dealers by reducing the NSCC Clearing Fund requirement.
Among banks, JP Morgan publically supported the move, saying that “diminishing systemic risk is a major priority”.
Patrick Kirby, chief operations officer of JP Morgan’s corporate & investment bank operations, said: “Both institutional and retail investors who trade with and through us benefit from the reduction in settlement time. This is a very significant step in making the industry safer and more reliable.”