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US T+2 settlement enters crucial testing phase

13 February 2017

Shorter cycle set to improve operational efficiencies and reduce counterparty risk

Industry-wide testing of a two-day (T+2) settlement cycle for stocks and bonds kicked off in the US on Monday.

Major bourses, banks, vendors and clearing houses started to funnel test trades through to the DTCC’s equities clearing corporation settlement arm NSCC at the start of the week. 

Bats, Nasdaq and OCC are among those involved. 

The trials mark the start of a crucial six-month window which will determine whether the US meets its September 5th deadline. 

T+2 essentially means settlement occurs over 48 hours as opposed to the current 72 hour period in place across the US market.

Advocates expect the shorter cycle to improve operational efficiencies, reduce counterparty risk and also align the US cycle with markets across the globe.

Europe made the switch to T+2 in 2014. Most of the other large markets in Asia, barring Japan and Singapore, have been operating on a T+2 cycle for a number of years.

The last time the US shortened its settlement cycle was in 1995, when it changed from T+5 to T+3.

"Real trades are now running through a test environment," John Abel, executive director of settlement and asset servicing strategy at DTCC, told Global Investor/ISF.

"Baring anything unforeseen, the September 5th date looks very promising for US market participants.

"We also expect the SEC to publish final rule set confirming the deadline in the very near future."

Abel is currently responsible for leading DTCC's initiative to move to the T+2 settlement cycle in the US – the largest capital market in the world.

The switch has been industry driven on this side of the Atlantic, as opposed to regulatory driven approach taken in Europe three years ago.

Nearly all financial market participants are impacted by the change requires firms to look closely at their asset servicing and trade processing arrangements.

Abel adds that securities lending participants may have less time to recall securities on loan and borrowers may have to be cognizant of the reduced timeframe when processing security recalls.

"Stock loan has been in focus recently when it comes to T+2, it’s worth firms taking a look at their securities lending documentation and the stock loan recall period," Abel said.

Service providers are also having to update their products and services to accurately process trades on a T+2 basis.

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