The move to shorten securities settlement from T+2 (trade day plus two days) to T+1 has been a success, but there is no rush to go to T+0, according to the U.S. securities industry trade group.
In a joint report released Thursday, the U.S. Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI) and The Depository Trust & Clearing Corporation (DTCC) said the transition to a shorter settlement cycle has succeeded at reducing settlement risk in U.S. securities markets.
According to the report, the move to T+1 — which took place in the U.S., Canada, and a handful of other markets in May of this year — has reduced the usage of the NSCC Clearing Fund by about 20% on average, resulted in 95% of trades being affirmed on the trade date, up from 73% in January, and the trade failure rates have remained consistent with the T+2 settlement environment.
“Ultimately, T+1 has provided the appropriate balance between increasing efficiencies and mitigating risk for the industry,” the group said. “Firms now can make better use of their capital and resources while promoting financial stability.”
Despite the industry’s satisfaction with the move to T+1, the groups stressed this doesn’t imply that the industry should move to T+0 anytime soon.
Further reducing the settlement cycle “would require a comprehensive independent review,” the report said.
“The industry consensus is that accelerating to T+0 is premature. It would require costly and extensive changes to market operations, potentially increasing risks for both institutional and retail customers. Any action towards T+0 should be preceded by an extensive cost-benefit and risk analysis to validate the perceived benefits outweigh the risks and costs,” the groups said.
While past efforts to reduce the securities settlement cycle have meant speeding up existing processes, adopting T+0 would likely require a “fundamental reinvention of a range of products and processes across the trade lifecycle,” the report said, which could prove disruptive to critical market functions.
Additionally, a move to T+0 could intensify operational challenges stemming from the use of different settlement cycles in major markets — with the U.K., Europe and certain Asian markets still operating in T+2.
“Key infrastructure like foreign currency exchange … could become increasingly disconnected from what is necessary to facilitate effective same-day settlement in the U.S.,” the report said.
Instead of starting work on a possible move to T+0, the industry and policymakers should focus on harmonizing at T+1 settlement with the rest of the world, the groups suggested.