Guest Contributor: Jeremiah J. O’Connell, Chief Executive Officer & senior principal, Jeremiah Associates LLC
The global industry is once again exploring the ideal settlement cycle. This has been a focus since an earlier change to T+3. The motivation for change is that a shorter interval of time between trade-settlement dates reduces the risks and costs associated with the settlement process.
The European Commission selected T+2 as the ideal cycle for harmonizing trade-settlement across the European community. In the US, DTCC commissioned a study by the Boston Consulting Group (BCG) on the cost benefit of shortening the trade-settlement cycle. BCG outlined the benefits and associated costs related to T+1 and T+2 cycles.
In this era of technological innovation why aren’t we considering same day trade–settlement of equity and fixed income trades as the most appropriate cycle? With the current state of technology, global communications and the pace at which financial services is moving, it’s an appropriate time for the industry to consider T+0 as a viable cycle.
Though T+0 will require herculean efforts to implement, as will T+2 or T+1, it should be the identified as the ideal end state for settlement of equity and fixed income trades. Reducing the trade-settlement cycle may need to be implemented in phases. These phases will allow time for industry participants, regulators and infrastructure support organization to prepare for the changes required
A phased-in approach will permit participants to incorporate changes, from T+1 or 2, for the future move to T+0. This will save or avoid costs associated with application technology as well as operational procedures changes required to meet interim and the ultimate goals
We should consider the following;
- It’s an opportunity for the industry to fully explore the feasibility of same day trade-settlement, identify changes required, determine the benefits and explore cost effective paths to T+0
- Without an identified ideal trade-settlement cycle changes made to accommodate interim cycles may cause rework to accommodate future cycles
- The US financial services industry has an opportunity to identify the ideal cycle, redefine trade life-cycle processes and lead the global industry to T+0
What are the potential saving of same day trade-settlement processing