The Road to Shorter Settlement Cycles

Settlement efficiency has long been an area of interest to policy makers in Europe as a means to mitigate risk in the financial markets. This was, in part, prompted by the Giovannini Group's reports on the barriers to settlement and clearing efficiency published in 2001 and 2003. Conversely, while the US had been at the forefront of accelerating its settlement cycles at the turn of the new millennium, its SSC goal of moving to T+1 was tabled after September 11, 2001, when US firms turned their attention to other areas of risk.

However, momentum and discussion around SSC in the US is once again gaining ground, and in response, The Depository Trust & Clearing Corporation (DTCC), with the guidance of the Securities Industry and Financial Markets Association (SIFMA), commissioned a Boston Consulting Group (BCG) report on the cost-benefit analysis of moving to SSC in the US, which was published in October 2012.

Managing Risk
The report makes for interesting reading. While it does not include any recommendations on accelerating the US settlement timetable to T+2 or T+1, it states that up to 75 percent of all survey respondents view SSC as a way to reduce risk across the industry, with 68 percent supporting the move and up to 60 percent mentioning their firms would benefit directly from risk reduction. Other key benefits cited included process efficiency, reductions in loss exposure and cost savings.

Indeed, according to the BCG paper, if the industry shifts just one day, moving from T+3 to T+2, the total savings in buy-side risk in the US alone would be $200M. When a second day is saved, moving from T+3 to T+1, the overall reduction in buy-side risk jumps to $410M. However, in order for this to be achieved, all firms must look at their operational processes and infrastructure to ensure they can meet the more aggressive timelines associated with SSC.

Balkanized
It is clear from the progress of regulation across the EU, the increasing debate in the US, and the likelihood that several Asian markets will follow, that SSC─perhaps even a global, harmonized settlement cycle─is on the horizon. Today, the global settlement landscape includes multiple, non-harmonized settlement cycles ranging from five days after execution to zero (same-day settlement), and each market determines its settlement cycle individually. Ultimately, regulators, policymakers and market participants all play an important role in achieving SSC and the resulting benefits of reduced systemic and firm risk, lowered costs across the industry and increased liquidity.

Regulators, policymakers and market participants all play an important role in achieving SSC and the resulting benefits of reduced systemic and firm risk, lowered costs across the industry and increased liquidity.

The BCG identified 11 enablers to achieving SSC, and while the paper focuses on the settlement cycle in the US, most enablers can be applied across all regions looking to achieve SSC. In this series, I will explore the enablers that fall squarely in the middle and back office, which are: Migration to Trade-Date Matching, Match to Settle, and Cross-Industry Standing Settlement Instruction Solution.

Next week, I will begin by looking at Migration to Trade-Data Matching, perhaps the most significant enabler to SSC globally.

Tony Freeman is the executive director of industry relations at Omgeo. Over the next few weeks, Tony will be contributing to Waters on the various enablers that need to be put in place in order to achieve SSC. The opinions expressed are those of the author, and do not necessarily reflect those of Waters or Omgeo.

Read the other parts of this series:

- The Road to Shorter Settlement Cycles

- The Migration to Trade-Date Matching

- The Need for Affirmation in Settlement Matching