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 Lee Cutrone
Managing Director, Industry Relations
January 4, 2010
Discussions continue to heat up in Europe and other regions around the world whenever the subject of shortening trade settlement cycles is raised. True, there may be an honest debate over the viability and practicality of instituting such a change, but one thing that is undeniable is that regulators must keep in mind the importance of robust post-trade infrastructures and harmonized operating models for market participants. Best practices such as same-day affirmation (SDA) reduce failed trades and ensure that systemic risk is minimized in the marketplace. It is vital that this underlying principle be a cornerstone of any change in settlement cycles, whether through regulated change or accepted industry practices.
As it stands today, settlement times are different in some markets around the world and it’s generally acknowledged that there are benefits to reducing and harmonizing settlement cycles in markets globally. For example, while Germany has a T+2 settlement cycle, the U.S. and UK – two of the world’s largest markets – as well as the rest of continental Europe, and Canada can still take up to three days to settle trades. In Asia, trades can settle in anywhere from one to three days, depending on the market. Such discrepancies can cause settlement issues when considering the global nature of much of the industry’s trading activity.
Moving to T+2 from T+3 could reduce exposure to counterparty risk and is considered favorable for systemic risk management. At the same time, harmonizing global markets around a T+2 settlement cycle could help reduce costs, particularly in situations where an investor buying in a T+2 market and selling in a T+3 market could have a one-day funding shortfall. However, past efforts to reduce settlement cycles, like several years ago when the U.S. considered moving to T+1, have been unable to gain the support of enough market participants. This then raises the question of whether the industry has weathered enough of a storm in the current crisis and improved its post-trade processing capabilities sufficiently to now get behind an effort to shorten the time given to settle a trade and reduce settlement risk?
That may remain to be seen, but regardless, market harmonization will become increasingly important as global regulatory reform progresses during the next 18-24 months. While the industry certainly seems more open to the discussion now than in the past, T+2 is more of a long-term goal and too much focus on immediate change could cause some industry supporters to abandon ship to avoid additional infrastructure changes that might be necessary.
The industry’s renewed attention to settlement cycles is certainly worth noting, but it is important that increasing focus be given to SDA in the shorter term. Without a doubt, SDA is one of the fundamental building blocks a market should have in place to lower the operational and settlement risk of trades, regardless of whether that market follows a T+3, T+2 or T+1 settlement cycle.
For any market considering reducing settlement times, SDA will help facilitate the transition, reduce risk and lower the cost of execution, and bring more stability and efficiency to the markets. For this reason, the industry should sharpen its focus on further enabling SDA in advance of assigning a specific settlement time across the globe. T+2 certainly is an important conversation, but we must keep in mind that while some markets appear to operate successfully in this environment, such as some markets in Asia, for others, it can be more difficult if the proper building blocks are not already in place. If SDA is a key facilitator for a shorter settlement cycle, why not adopt THAT as the standard model today, knowing that it could help make the goal of T+2 much easier to achieve whenever the market decides on such a change.
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