The NASPP Blog

In early February, the SEC approved of rule changes by the NYSE and Nasdaq that are necessary to shorten the settlement cycle to T+2. The approved rule changes relate to the calculation of ex-dividend dates and several other administrative procedures that I don’t understand. The exact rules that were changed aren’t particularly important; what is important however is that yet another task on the T+2 to-do list has been checked off.

I recently listened to the recording of the session “Be Prepared For T+2” from last year’s NASPP Conference. (This was a great panel, by the way. So great that we’ve asked the panelists to give a repeat performance for our April webcast. Be sure to check it out.) Here are a few things I learned from the panel.

Why T+2? It’s All About Risk

The move to T+2 is industry driven, rather than a push from regulators, with the goal being to reduce risk in the settlement process.  Currently trades are settled through a central counter-party, which you know as the DTCC (Depository Trust & Clearing Corporation).  One of the DTCC’s roles is to guarantee delivery of shares to the buyer and cash to the seller.  If, over the three-day settlement period, either one of these parties flakes out, the DTCC steps in to make the non-flaking party whole.

This requires cash. With securities worth $8.72 billion changing hands every day on the US markets, it requires a lot of cash. The panelists described it as a big suitcase of cash held by the DTCC that can’t be used for anything else. But the DTCC isn’t your rich uncle; this cash is provided by various market participants (such as brokerage firms).

If we can shorten the settlement cycle, the inherent risk is reduced, and less cash is needed to guarantee settlement. This frees up cash that market participants can use for other, presumably better and more profitable, purposes.

Remember Y2K?

The process of changing to T+2 is not dissimilar to what we all went through back when we were preparing for the new millennium. It’s not terribly complex, but there are a lot of rules and processes that have to be reviewed, updated, and tested.

The Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) have formed an Industry Steering Committee to define the path to T+2. (They even have their own website and a nifty logo, because any self-respecting industry-wide initiative needs a logo.) The steering committee commissioned Deloitte & Touche to prepare a T+2 Playbook detailing all of the changes that have to take place to shorten the settlement period by a day. Europe moved to T+2 in 2014 and apparently there were some lessons learned during that process.

What About T+1? Or T+0?

The consensus of the panel is that T+1 is a long ways off.  Moving to T+2 merely requires that the current processes speed up.  Moving to T+1 would require real-time clearance; that’s a fundamental change to the entire settlement process. You can rest assured that you’ll have plenty of time to get use to T+2 before having to worry about T+1.

Wait, There’s More!

Stay tuned! On Thursday I’ll discuss the steps you should be taking to prepare for T+2. Also, don’t miss our April webcast, “Be Prepared for T+2.”

– Barbara