The settlement period for in-scope securities traded on the secondary market in the US is currently trade date plus three business days (T+3). The financial services industry, in coordination with regulators, is planning to shorten the settlement cycle to trade date plus two business days (T+2) in Q3 2017.
T+2—the shortening of the current settlement cycle to reduce credit risk and align with the majority of the world’s markets (with the significant exceptions of Japan, Spain and Australia)—represents a major operational challenge for US market participants. The immediate focus needs to be on whether participants can update their systems and processes in time, with speculation that further down the road, T+2 might lead to T+1 and, eventually, to T0.
All securitized products, including equities, corporate bonds, municipal bonds, and unit investment trusts—as well as financial instruments based upon these instruments—are subject to T+2. The move to a shorter settlement cycle should reduce credit and counterparty risk and improve operational processes. Market participants should also benefit from cash deployment efficiencies, increased market liquidity, lower collateral requirements and greater harmonization of global settlement processes.
We expect the impact of T+2 to be far-reaching, affecting buy- and sell-side participants as well as infrastructure providers in areas ranging from operations to credit risk, collateral and capital management, and regulatory reporting. However, T+2 is not new; other markets have gone through the T+2 transformation, and participants in the US markets can learn from this experience.
As a starting point, US firms could be looking at some key areas where, as the European experience indicates, significant work needs to be done. These include:
- All Functions — Understanding that, while T+2 and T+1 already happen in the US, these are mostly exception processes and typically require numerous manual steps; don’t assume that these are robust enough for 2017
- Front office – Updating settlement cycles for products and ensuring that stock loan and repo desks have the correct position data, both current and forward looking
- Operations – Updating all processes, technology and documentation to reflect shorter settlement cycles
- Risk – Obtaining a better understanding of source data in light of shorter credit cycles
- Treasury – Understanding shorter funding cycles and changes to credit risk
- Data – Updating collection and maintenance of reference data and ensuring all sources that store settlement timelines are updated
- Compliance – Ensuring all regulatory reporting standards are met
This is only a partial list of to-dos for T+2. With the implementation deadline scheduled for September 5, 2017, firms that have not done so need to identify resources and get plans and implementation processes in order.
In the next blog in this series, we will look at other T+2 considerations and some questions that may help firms organize the implementation process. In the meantime, if you would like to discuss your firm’s T+2 plans, please email me.