Moving to T+0 or ’T end of day’ would require fundamental and costly changes in market operations affecting institutional and retail customers and actually increase risk, said Kenneth E. Bentsen, Jr., President and CEO of SIFMA.
“Shortening the settlement cycle beyond one day embeds more risk without creating additional benefits available for widespread adoption across the industry,” he said in the SIFMA’s blog, Pennsylvania + Wall.
Currently, the Securities Industry and Financial Markets Association (SIFMA) and its industry partners – the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) – are taking steps to accelerate the U.S. securities settlement cycle from T+2 to T+1.
In December 2021, the industry group issued a report, Accelerating the U.S. Securities Settlement Cycle to T+1, which provides firms with a roadmap for shortening the settlement cycle, including considerations, recommendations, and next steps for moving to T+1 in the first half of 2024.
“This timing will allow firms to assess the changes they need to undertake, the industry to conduct comprehensive testing, and regulators to make the necessary regulatory changes,” said Bentsen.
The settlement cycle is the time between the trade date, when an order is executed in the market, and the settlement date, when participants exchange cash for securities and a trade is considered final.
Moving to a T+1 settlement cycle will require significant planning, execution, and testing, said Bentsen.
Moreover, it will require substantial changes in market operations.
“Accelerating the settlement cycle to T+1 is a complex undertaking with real benefits for investors and the markets,” he added.
In the case of T+0, the industry group found that the law of diminishing returns applies.
Bentsen said that a T+0 settlement cycle isn’t easily achieved by all industry participants due in part to their reliance on current business, infrastructure, and operational processes.
“ A T+0 framework no doubt would impact the competitive landscape in a way that disadvantages market participants who are unable to make the investment or lack the scale to compete in such an environment, creating winners and losers across the industry and impacting competition,” he said.
He added that smaller participants with limited resources would be at a competitive disadvantage to make the necessary investments, but it’s not just about firm size.
Bentsen said the competitive landscape would shift in terms of cross-border issues, institutional versus retail, and fixed income versus equities, with each firm’s operations being put under “extreme stress” to entirely change their processes for settling trades in a long list of markets, including but not limited to equities.
“Perhaps even more important, retail investors, many of whom don’t have pre-funded accounts or still use checks, would be required to alter their behavior,” he said.
In addition, T+0 would likely result in more failed trades in the system, Bentsen said.
He said that fails are caused by incorrect settlement instructions, trade details, or other human errors and occur when settlement errors are not corrected in a timely manner before settlement date: “Compressing the settlement time to T+0 would expand the number of fails, as it takes time to repair fails.”
In addition, T+0 would impact firms’ regular compliance efforts to identify and root out cybercrime or fraud, added Bentsen.
The industry working group has identified many other critical areas which would be significantly impacted and become exponentially more challenging to manage during high volume, high volatility market periods in a T+0 environment, including: reengineered securities processing; securities netting; funding requirements; impact on retail investors; securities lending; prime brokerage; global settlement; primary offerings, derivatives markets, and corporate actions; as well as mutual funds.
“The concept of T+0 or end of day settlement may indicate the appearance of maximum efficiency, but our analysis found that in fact it would introduce new operational risk and require fundamental changes and likely increase costs to investors,” Bentsen concluded.
