U.S. financial markets have been moving toward a T+2 transaction settlement period with the transition beginning on September 5. The new settlement period has been led by the T+2 Industry Steering Committee (T+2 ISC) with participation from financial services industry professionals, The Depository Trust & Clearing Corporation (DTCC), the Investment Company Institute (ICI), and the Securities Industry and Financial Markets Association (SIFMA).
Approval of T + 2 Transaction Settlement Period
The new settlement period was approved by the U.S. Securities and Exchange Commission (SEC) in March 2017. The shortened settlement period reflects modernization across the industry, providing increased efficiency and faster processing times through the use of upgraded technologies. In comments regarding the new settlement period, SEC Acting Chairman Michael Piwowar said, “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”
In approving the new settlement period, the SEC modified Rule 15c6-1(a). This Rule was last revised in 1995 when the settlement period was shortened to T+3 from T+5. The T+2 transaction settlement was determined to apply to the same securities previously utilizing T+3, stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange. It was determined that the rule would take effect on September 5, 2017 with direction for implementation guided by the T+2 ISC.
Implementation of New Transaction Settlement Period
The T+2 ISC was developed to facilitate and provide support for the implementation of the new T+2 period across the U.S. financial market. To implement the processing change the T+2 ISC was developed out of the DTCC which also formed a working group and sub-working group to facilitate the changes. The committees included participation from the DTCC, ICI and SIFMA as well as industry professionals from all aspects of the market. Co-chairs leading the T+2 ISC included Marty Burns, ICI chief industry operations officer, and Thomas Price, SIFMA managing director. Leading up to the September 5 effective date the committees were charged with working with market participants to promote the new transaction settlement period and ensure that it would be instituted efficiently.
Benefits of T+2
In modernizing the transaction settlement period from T+3 to T+2 it adds numerous benefits for the industry. T+2 helps to mitigate trading risks for all parties involved in the transaction. It shortens the exposure risk to operational and systemic factors, specifically since the time between trade date and settlement date is one of the leading variables for measuring operational risk. The shorter settlement period also enhances market efficiency and provides for a more coordinated market with faster and more accurate accounting for transaction participants. Additionally, it also supports increased financial stability and improved safety.
Worldwide Transaction Settlement
The T+2 transition in the U.S. was also supported by the Canadian market which also implemented the new transaction settlement period in September. In Canada, T+2 transaction settlement has been a topic for debate since July 2016 when the Investment Industry Regulatory Organization of Canada (IIROC) first issued a notice for comment amendments regarding the facilitation of a transition to T+2.
The September 2017 T+2 transaction settlement transition comes three years after Europe harmonized their settlement cycle to T+2 which included adoptions of the settlement from 23 European countries. Other countries implementing T+2 include Australia and New Zealand which integrated the change in 2016. Across the world faster settlement has been a trend and in Asia/Pacific some markets already using T+2 are considering a change to T+1.
In the U.S. T+2 was greatly supported by the SEC, DTCC, ICI, SIFMA and industry participants allowing for a smooth transition to the new settlement processing. Overall, advancing technologies, modernization and an increased focus on risk reduction following the global financial crisis are trends affecting rules and guidelines governing operational processes in the financial markets worldwide.