T+2 Seen as the Future Norm for Settlement Cycles

A poll of buy- and sell-side firms by Omgeo has found that four out of five respondents believe that the transaction date plus two days, aka ‘T+2’, will become the global standard for settlement cycles within the next 10 years.

Omgeo, a wholly owned subsidiary of The Depository Trust & Clearing Corporation (DTCC) notes that current settlement cycles vary between T+3 in the US, to T+2 in Europe and differing cycles across Asia, including T+2 in Hong Kong and T+3 in Singapore.

Fifty-two per cent of the 583 survey respondents expect the US to move to a T+2 settlement cycle within the next three years, while 34% and 14% believe Canada and Japan respectively will do the same.

“It is encouraging to see overwhelming support for a globally harmonised settlement cycle to T+2, which would significantly reduce counterparty and operational risk across the financial markets<” commented Tony Freeman, Omgeo’s executive director of industry relations.

“Harmonising settlement cycles globally will help to better facilitate cross-border trading, as well as reduce margin and liquidity requirements during market volatility. So far, Europe’s move to T+2 has been smooth, as recognised in the survey.

“However, there are still wide-ranging views on failed-trade penalties and on the sanctions that should be implemented for non-adherence. The future will bring further change, with more detail expected on the settlement discipline regime.”

The survey confirmed that, in terms of Europe’s move to a T+2 settlement cycle last year, 74% of market participants believe the migration was smooth, with only 12% citing they would have a low chance of meeting the Central Securities Depositories Regulation (CSDR) 99.5% settlement efficiency target.

There was an almost equal split in opinion on whether the proposed compensatory, not punitive, sanctions from the CSDR for failed-trade penalties would be enough to drive behavioural change.

Paula Arthus, president and chief executive (CEO) at Omgeo, said: “For firms with European trading activity, automating post-trade processes is critical. Our research confirms this. 62% of respondents believe that it makes sense to send allocations and settlement instructions to broker/dealers on trade date and that broker/dealers must confirm allocations within just two hours.

“Furthermore, over 90% think that accurate standing settlement instructions (SSIs) are relevant for T+2 settlement cycles.