The Road to Shorter Settlement Cycles:
Creating a trade date environment in the US and across the global markets
The financial markets, including its participants and regulators, are focused on removing risk from the industry. The reduction of systemic risk is a key priority for the G20 as a result of the global financial crisis, but more broadly the industry is exploring ways to reduce all types of risk, including settlement and operational risk.
One area that is gaining particular attention is the focus on reducing the time it takes to settle a trade, also known as shorter settlement cycles (SSC). Today, there is growing agreement among policymakers, regulators and market participants alike that shorter settlement cycles benefit the industry and investors, since faster and more efficient settlement practices reduce counterparty risk exposure and promote the efficient use of capital.
Yet there is no simple answer to the question, “Why, in 2013, does it take milliseconds to execute a trade, but three days to settle a trade in the US and in other major markets around the world?” The most likely answer is simply because that is the way it has always been. Surprisingly, some operational processes, which originated in a bygone era of physical certificates and limited technology, are still in use today. But the tide is now turning. With many major markets in Asia already on T+2, the EU poised to move to T+2 by January 2015, and the US exploring shorter settlement cycles in the local market, industry participants worldwide are now focused on the operational impact of supporting this important move.
This paper looks at the current status of the global move to SSC, the benefits and the challenges of implementation, and the enablers to achieving SSC.
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