For many years, markets operated on a "T+5" settlement cycle. In 1995, the U.S. Securities and Exchange Commission reduced the settlement cycle from five business days to three business days, "T+3" , which in turn lessened the amount of money that needs to be collected at any one time and strengthened our financial markets for times of stress.
T+3 Settlement Cycle
Trade Date (T)
The post-trade clearance and settlement cycle begins on the date the trade is executed. On this date, trade details for equities, and corporate and municipal bonds are electronically transmitted by participants to the National Securities Clearing Corporation (NSCC) for processing, the majority of which are in real-time. NSCC is a subsidiary of the Depository Trust & Clearing Corporation (DTCC). NSCC sends to participants automated reports, which are legally binding documents that show trade details - including share quantity, price and security. These reports confirm that transactions have entered the clearance and settlement processing stream.
NSCC's guarantee of settlement generally begins midnight between T+1 and T+2. At this point, NSCC assumes the role of central counterparty, taking on the buyer's credit risk and the seller's delivery risk. This guarantee eliminates uncertainty for market participants and inspires public confidence.
NSCC issues broker/dealers summaries of all compared (i.e., "cleared") trades, including information on the net positions of each security due or owed for settlement.
T+3 is settlement - the delivery of securities to net buyers and payments of money to net sellers. Broker / dealers instruct their settling banks to send or receive funds (through the Federal Reserve System) to / from the Depository Trust Company (DTC) as NSCC's agent. Securities generally do not change hands physically. DTC transfers ownership between broker/dealers' accounts by book-entry electronic movements.
SIFMA supports a move to shorten the settlement cycle for U.S equities, corporate bonds and municipal bonds to trade date plus two days (T+2) from the current T+3. SIFMA recognizes that shortening the settlement cycle on a timeframe that is workable for all market participants can meaningfully benefit investors by reducing systemic risk.
SIFMA notes that shortening the settlement cycle is a fundamental change to existing market practices that must be implemented with great care to avoid any operational disruptions that could negatively impact investors. SIFMA believes the best path forward is a measured approach that recognizes the challenges to diverse market participants, including individual investors, and products.
The Depository Trust and Clearing Corporation (DTCC) is leading an industry initiative to coordinate efforts around identifying and analyzing obstacles to move to a T+2 settlement cycle. Their goal is to put a plan in place to address these obstacles, and ultimately determine a recommended T+2 target date in the US markets.
SIFMA recommends that the industry, DTCC and regulators continue to work together to accomplish key "building blocks" that together over time will ensure a smooth transition to T+2. Key building blocks for shortening the settlement cycle include compression of timeframes for clearing and settling, specific regulatory rule changes, changes to the trade affirmation process, and other systems and process changes.
DTCC is working with SIFMA and a broad range of firms and trade associations to analyze these building blocks, and has formed an industry working group with multiple issue-specific subgroups to undertake a detailed analysis of the rule sets, operational and technology changes, customer impacts and behavioral changes needed for a move to T+2.
This in-depth analysis of the building blocks with market participants is necessary to ensure a smooth transition plan that is carefully executed so as not to unintentionally disrupt operations or negatively impact investors.
More information on the project is available at: www.USt2.com.
In 2012, DTCC released a business case developed by The Boston Consulting Group (BCG) studying the impacts of potentially shortening the trade settlement cycle in the U.S. financial markets for equities, corporate and municipal bonds and unit investment trust (UIT). The business case examines the costs and benefits of shortening the trade settlement cycle for these instruments in the U.S. financial markets from T+3 to T+2 or T+1, but does not make a recommendation for any change, and was carried out with the guidance of SIFMA. View Study (PDF)