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 at 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 in the third quarter of 2017. SIFMA believes that shortening the settlement cycle will meaningfully benefit investors and reduce counterparty risk, decrease clearing capital requirements, reduce pro-cyclical margin and liquidity demands, and increase global settlement harmonization.
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.
T+2 Industry Steering Committee
The Depository Trust and Clearing Corporation (DTCC) is leading a Shorter Settlement Cycle (SSC) initiative to prepare the industry for a move to T+2 and in 2014 formed an Industry Steering Committee (ISC), which is made up of a broad range of firms and trade associations and is co-chaired by SIFMA and the Investment Company Institute (ICI). The ISC oversees the Industry Working Group (IWG), and Sub-Working Groups (SWGs). These groups were responsible for assessing the scope, requirements, and changes needed to facilitate the implementation of T+2.
In June 2015, the ISC released a white paper outlining the timeline and industry-level actions required to move to a two-day settlement cycle in the U.S. by the end of Q3 2017. The ISC is currently focused on the compression of timeframes for clearing and settling, specific regulatory rule changes, as well as changes to the trade processing, asset servicing and other systems and process changes.
More information on the project is available at: www.USt2.com.
The Securities and Exchange Commission (SEC) strongly supports the industry's move to a shorter settlement cycle and Chair White directed the industry in September 2015 to provide a detailed implementation schedule, including interim milestones and dependencies. Further, Chair White indicated that she had directed SEC staff to work closely with impacted SROs to develop detailed schedules to consider the necessary rule amendments for a move to a shorter settlement cycle. Impacted SROs are supportive of the industry's move, and are scheduled to publish rule change packages for public comment throughout late 2015 and 2016.
On March 22, 2017, the U.S. Securities and Exchange Commission (SEC) Acting Chair Piwowar and Commissioner Stein voted unanimously to approve changes to SEC Rule 15c6-1 that facilitate a move to a T+2 settlement cycle, aligned with the industry-selected transition date of September 5, 2017.
In response to Chair White's request, on December 21, 2015, the T+2 Industry Steering Committee (ISC) published an T+2 Industry Implementation Playbook (the "Playbook"), which includes a detailed timeline, milestones, and dependencies to achieve a shortened settlement cycle for equities, corporate and municipal bonds, unit investment trusts, and financial instruments composed of these products traded on the secondary market by the third quarter of 2017. The Playbook builds on the work published in the June 2015 industry white paper, and documents the results of an extensive industry analysis, facilitated by Deloitte Advisory LLC, that engaged participants from across the industry, including buy-side firms, sell-side firms, small and large firms, retail and institutional firms, vendors and service providers, clearing firms, exchanges, transfer agents, and others.
Note: 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).