The apparently seamless shift in the U.S. to a trade-plus-two-day settlement cycle, or T+2, from the previous three-day cycle has some industry participants looking to reduce the cycle even further to bring more benefits to asset owners and money managers.
The move to T+2 resulted in an estimated 25%, or $1.36 billion, reduction in capital requirements for settlements, according to clearinghouse and settlement provider Depository Trust & Clearing Corp. That same amount of savings could be realized by reducing the cycle by another day, said John Abel, DTCC executive director, settlement and asset servicing, New York, though he cautioned it would come at a much higher compliance cost for industry participants than T+2.
"T+1 is definitely possible," said Ryan Burns, head of North American relationship management, global fund services, Northern Trust Corp., Chicago. "The big consideration and approach is the success of the T+2 process. If custodians, brokers and other market participants can do the transition to T+2 seamlessly, then an eventual transition to T+1 is possible."
Pinar Kip, New York-based executive vice president and head of global strategic operations at State Street Corp., took it a step further. "If you have an arrangement with a trading partner, you can have T+0 (immediate settlement) now. You'd have to have the assets and cash ready, and make sure your custodians are aware. … You would need that level of requirement and the technology to do it. We don't have that yet."
Reducing the settlement cycle is a plus for asset owners and their money managers, sources said. For asset owners like pension funds, a shorter cycle means reduced market and counterparty risk while a trade is being settled. For managers, a reduced cycle adds an alpha source as it frees up assets for investment that otherwise would have had to be held longer as collateral.
"If we think about the biggest benefits in the transition" to a shorter settlement cycle, managers that are well positioned to handle a shorter cycle "are in a situation where they can tout that (to asset owners) and display operational alpha opportunities," said Rian Akey, partner and global head of operational due diligence at Aon Hewitt Investment Consulting LLC, Chicago.
Ms. Kip said a shorter cycle "absolutely" benefits asset owners. "They care about the cash management phase of the cycle," Ms. Kip said. "With a shorter cycle, it frees up money to invest."
By all accounts, the Sept. 5 shift to T+2 in the U.S., Canada, Mexico, Peru and Argentina went off without a major hitch.
"It reminds me of Y2K," Steven Dapcic, Jersey City, N.J.-based director, corporate actions group, Pershing LLC, Bank of New York Mellon Corp.'s clearing and settlement unit. "It took a lot of work to get there, but once it happened it went pretty smoothly."