(Bloomberg News) The Depository Trust & Clearing Corp. is commissioning a study on whether the U.S. securities industry should cut the time it takes to process transactions, a shift that may reduce risk while forcing brokers and asset managers to spend more on record-keeping.
The New York-based company that handles and guarantees trades in U.S. stocks, corporate bonds and municipal securities hired the Boston Consulting Group Inc. to assess the costs and benefits of settling trades in fewer than three days, the current standard, Elena Staloff, a vice president at DTCC, said in a phone interview. A shorter cycle would mean firms could post less capital to the clearing fund run by DTCC subsidiary National Securities Clearing Corp. to cover a defaulting broker's obligations and pay less to meet the organization's liquidity needs to handle a problem, she said.
A 2000 industry report about completing transactions in a day said the one-time cost of moving to a so-called T+1 settlement would be $8 billion for the securities industry and could be implemented within four years. The savings would be $2.7 billion annually, the study found. More trading-related processes have been automated since then and it's unclear whether the costs now would be higher or lower, Staloff said.
"I'm hoping we get an independent read on where the industry is now in terms of its readiness to shorten the settlement cycle," Staloff said. DTCC is working with the Securities Industry and Financial Markets Association to evaluate the case for a shorter cycle. "Shortening the settlement cycle should help our member firms with their capital and liquidity needs but we don't know what the costs would be."
The 2000 industry plan was put on hold as market conditions deteriorated after the 2001 terrorist attacks. Instead, the focus turned to automating post-trading systems and processes.
"We want to revisit the building blocks or obstacles identified in the 2000 study that may need to be tackled in order to evaluate how cost effective and efficient it may be to shorten the settlement cycle," Tom Price, head of operations, technology and business continuity planning at Sifma, said in a phone interview. He said no decision has been made about whether to preserve the current T+3 environment or move to a two-day or one-day cycle, or "T+2 as a first step toward T+1."
While compressing the timeframe may reduce the risk that DTCC and member firms face in the event of a broker's default, the change could increase the number of failed trades or transactions that aren't completed on time, boosting risk, Price said. Sifma wants to explore these issues and help determine what the impact would be of an abbreviated cycle, he said.
This issue has surfaced in part because of European plans to harmonize the settlement cycles across most countries in the region to T+2 and efforts by regulators to bolster the "basic plumbing of the industry," Price said.