In the late 1990s and early 2000s, the Securities Exchange Commission (SEC) pushed for T+1 settlement processing and STP (Straight Through Processing) in the market. The Securities Industry and Financial Markets Association (SIFMA), formerly the Securities Industry Association (SIA), helped to secure support to push T+1 along. The Depository Trust and Clearing Company commonly referred to as DTC was a key player the SEC and SIFMA needed to be on board for the T+1 settlement initiative. However, DTC and the SIFMA soon found out that the cost of the initiative and the market strain left from September 11, 2001 made it difficult to push forward.
About the Depository Trust & Clearing Company (DTCC)
DTCC is one of the top securities clearing companies with a total of $1.88 quadrillion securities transaction settled in 2008. The company provides clearing, settlement and information services for various investment products. DTCC provides these services via its seven subsidiaries:
- National Securities Clear Corporation (NSCC)
- The Depository Trust Company (DTC - forerunner of DTCC)
- Fixed Income Clearing Corporation (FICC)
- DTCC Loan/SERV LLC
- DTCC Deriv/SERV LLC
- DTCC Solutions LLC
- EuroCCP Ltd
What is T+1 Settlement?
T+1 reads as trade date plus one day. T+1 is a part of the trade life cycle between the time when the trade is executed and the day the trade is paid for or settled. The term T+1 settlement means a trade will be settled or paid for and delivered to the buyer the day after the trade is executed. DTC T+1 settlement is nonexistent at the moment and the company continues to operate on the SEC mandated T+3 settlement cycle.
The Desire for T+1 Settlement
The main push for DTC T+1 settlement processing is to reduce risk. Trades often fail because the buyer does not have the funds to settle the cash side of the trade (pay for the trade). With the current T+3 settlement cycle, a company can fold, go bankrupt or a major economic crisis can hit an economy between trade date and T+3 (settlement date). Since DTCC settles vast amounts of securities a year, having DTC T+1 settlement would greatly reduce trade failure in the market.
T+1 Conversion Postponement
In July 2004, all T+1 settlement initiatives, including DTC T+1 settlement conversion initiatives were postponed indefinitely by the SIFMA. September 11, 2001 played a huge role in the postponement as many banks were still recouping from the financial losses of that day. However, the biggest obstacle standing in the way of T+1 settlement was lack of industry interest and support of the initiative due to the cost vs. benefit aspect of T+1 settlement processing.
DTC T+1 settlement processing would require STP functionality. This means trade matching would need to be fully automated, the acceptance of paperless transactions agreed to by the buyer and seller and technology capable of handling STP with minimal system breaks along the cycle. STP would take years to achieve as different aspects along the cycle needed to be worked out. DTCC has made a huge leap toward STP with Real Time Trade Matching (RTTM) for their fixed income, mortgage-backed securities and certain equity products. RTTM allows a transaction to be tracked from trade data entry to clearance and regulatory reporting in real time, resulting in immediate trade execution confirmations.
Will DTCC Make T+1 Become a Reality?
DTC T+1 settlement processing can become a reality once STP is realized. RTTM is not enough to make this happen. For DTC this means four days worth of matching and comparisons need to be cut in half. The current T+3 cycle is as follows:
- Trade Date (T) - trade is executed
- T+1 - NSCC guarantees the settlement assuming buyer credit risk (ability to pay) and seller delivery risk (ability to deliver the investment)
- T+2 - NSCC issues summaries of all compared trades
- T+3 - securities are delivered and paid for
This summary of the four day settlement cycle involves various people from both DTCC and other banks along with front and back end processing required from both sides (buyer and seller). Right now the lowered risk of the current T+3 settlement cycle does not warrant the urgency and expense for DTC T+1 settlement processing to become a reality. However, if more technologies continue to be developed that will aid in the creation of a STP system, DTC T+1 settlement processing may be in the market’s future.
Colby, R. L. (2002, May 20). Speech by SEC Staff: Remarks before SIA Spring T+1 Conference. Retrieved February 5, 2010, from Securities and Exchange Commission: https://www.sec.gov/news/speech/spch568.htm
Depository Trust and Clearing Company. (n.d.). The T+3 Settlement Cycle. Retrieved February 5, 2010, from Depository Trust and Clearing Company: https://www.dtcc.com/about/business/tplus3.php
DTCC. (2004, June 23). @DTCC. Retrieved February 15, 2010, from Securities Exchange Commission: www.sec.gov/rules/concept/s71304/s71304-26.pdf
Securities Industry and Financial Markets Association. (2002). SIA T+1 Corporate Actions Subcommitte White Paper 2001. Retrieved 2010, from Securities Industry and Financial Markets Association: www.sifma.org/services/techops/pdf/SIACorp_Actions_whit1.pdf
Waters. (2003, June 1). The Bond Market Association’s NON-VMU. Retrieved February 7, 2010, from Waters: https://db.riskwaters.com/public/showPage.html?page=129977