Michael Bodson, DTCC

Summary List Placement

In the world of one-click purchasing, instant payments, and two-hour delivery, many investors find it counterintuitive that securities trades in the US can take two business days to complete or settle, known as the T+2 settlement cycle.

Given the pandemic-related market volatility in March 2020, and other occasions since then, market participants are looking for ways to increase efficiency, reduce risks and lower costs in the equities settlement cycle. The answer is to shorten the settlement cycle. 

But questions remain: How fast should the settlement cycle be and how quickly can we, as an industry, get there? 

DTCC believes the right timeframe for the equities settlement cycle at this time is T+1.

This would deliver significant benefits to the markets and investors by lowering margin requirements, improving capital liquidity, and reducing risk, while maintaining the efficiencies, resilience, and soundness that makes our capital markets the deepest, most efficient, and liquid in the world.  

T+1 will reduce risk and lower margin requirements

Under the T+2 settlement cycle, risk is spread over two full business days. To reduce this risk, clearinghouses —which are responsible for clearing and settling trades — guarantee the completion of trading activity.

This trade guarantee operates like an insurance policy, with the clearing agency assuming the risk in the event that either of the trading parties defaults on their obligations. Buyers have peace of mind they will receive their shares and sellers have confidence they will receive their money. 

To be able to provide this guarantee, clearing agencies collect margin, such as cash, from their members to cover the portfolio risk presented by their individual activities. Members include banks, broker-dealers, and other market participants.

Reducing the time from the point of trade execution to the point of settlement to one day (T+1) would lower that risk and, therefore, reduce the amount of margin that firms need to post to the clearing agencies. At the same time, a T+1 settlement cycle would provide market participants with enough time to purchase equities using margin, or loans, from brokerages, as brokerages typically arrange financing or purchase shares to settle trades each day.

With T+1, market participants could also continue to take advantage of a key benefit of the clearing agencies’ processing: the end of day multilateral netting process.

On a typical trading day in 2020, DTCC’s equity clearinghouse, NSCC, processed an average of $1.7 trillion in equities transactions. The multilateral netting process reduced that number by about 98% and the …read more

Source:: Business Insider

      

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Here’s why it’s time to shorten the settlement cycle for US stocks

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