Shortening US trade settlement cycle a big money saver - BCG

Shortening US trade settlement cycle a big money saver - BCG

Shortening the time period between trade execution and settling payment for US cash securities transactions could reduce the industry's costs and risk exposure by several hundred million dollars a year, according to a report from the Boston Consulting Group (BCG).

Currently, the US securities industry completes settlement for trades in equities and certain debt securities on the third day after a trade is executed (T+3). In March, the Depository Trust & Clearing Corporation (DTCC) and Securities Industry and Financial Markets Association (Sifma) called in BCG to examine the business case for cutting this.

Following 18 weeks of analysis, the management consultancy has concluded that same day settlement (T+0) is not feasible but that moving to T+1 or T+2 could prove worthwhile returns on their investment.

Moving to T+2 would cost the industry a $550 million investment and require the introduction of trade date matching, match to settle, a cross-industry settlement instruction system, dematerialisation of physicals, 'access equals delivery' for all products, and increased penalties for fails.

Moving to T+1 would cost $1,770 million and could be built on the same but would also require an infrastructure for near-real time processing, transforming securities lending and foreign buyer processes, and accelerating retail funding.

However, switching to T+2 would result in annual operational cost savings of $170 million while the reduction in risk exposure on unguaranteed buy-side trades would be up to $200 million. For T+1 the cost savings would be $175 million a year and risk exposure reduction up to $410 million.

This means, says Chandy Chandrashekhar, partner and managing director, BGC, that the payback on upfront costs would be just three years for T+2 and 10 years for T+1.

"Our initial industry outreach, prior to the results of the cost benefit analysis, also shows that 68% of participants favour a shorter cycle and 27% of participants consider such a move a high priority for bringing greater efficiency and risk mitigation to the US financial markets," says Chandrashekhar.

The DTCC insists it is not "predisposed" to any one option, with Michael Bodson, president and CEO, saying: "Over the coming months, DTCC will spearhead further outreach with all industry constituents to enlist feedback on the various scenarios the report outlines to determine next steps, if any, to be taken."

The European Commission has advocated the use of financial penalties for settlement failure, as well as a requirement for trades to settle within two days of the trade date (T+2), in its proposal for Central Securities Depositories (CSDs) and settlement efficiency, published in March 2012.

Custodian banks, however, are concerned that the risk of settlement failure will increase exponentially if shorter settlement cycles are not preceded by an increase in the efficiency of the middle office, particularly in the trade matching process.

Finextra gathered a host of industry experts to debate the issue in a special T+2 Webcast in September. Register now and hear from:

  • Alan Cameron, head of client segment - broker dealers and investment banks, BNP Paribas
  • Ben Parker, executive director, head of EMEA clearing and settlement, Investment Bank, UBS
  • Robert Fair, senior business development manager, Euroclear
  • Tony Freeman, executive director of industry relations, Omgeo
  • Virginie O'Shea, analyst at the Aite Group (moderator)

Comments: (2)

Gary Wright
Gary Wright 05 October, 2012, 11:16Be the first to give this comment the thumbs up 0 likes

I totally dissagree with these findings. Apart from the major problems that getting the retail business to operate in virtually real time and the fact that accurate settlement data is still a huge industry problem there is simply not enough standards and far too much matching in different silos

Any cost reduction if there were any must be measured against the loss of revenues from stock borrowing and the like.

Reducing the settlement cycle only looks good to those that focus on a simplistic level.There is much work to do to get the industry working in almost real time to achieve T+2. Any reduction from current settlement success rates that run in the high nineties also appears to negate any benefits of change. I recomend that these studies go into far more detail before announcing any conclusions   

A Finextra member
A Finextra member 09 October, 2012, 12:35Be the first to give this comment the thumbs up 0 likes

We have been here before.  It was nonsense last time and it is nonsense this time too.  You can be quite sure that the costs for such an industry-wide upheaval are understated whereas the savings are almost certainly optimistic.  Ten years payback?  More like never!