Unsettled over settlement

Lens blog readers will no doubt question why it takes days to complete settlement of a securities transaction. For many years, UK equities transactions settled on ‘T+3’ – meaning that ownership of the security transferred from seller to buyer, against receipt of payment, three days after the trade was executed. When trading UK government bonds, however, settlement typically completes on the next working day (T+1).

At the turn of the millennium, the US staged a project, led by the Securities Industry Association (SIA), to shorten the settlement period in this market from T+3 to T+1 for all mainstream securities. But in September 2001, the SIA, driven by pressures from its members, decided that the market was not ready for T+1 settlement. Market participants apparently lacked the technology and operational discipline to complete settlement requirements within a one-day timeframe – and the SIA believed this would lead to more failed trades and higher operational risk, not less as intended.

And there we have remained for almost 20 years – questioning why we can build quantum computers, put explorers deep into space, but still we wait several days to settle a securities trade. There has been some progress. The EU’s Central Securities Depository Regulation established T+2 as its standard for equities settlement in 2014 and the US moved to T+2 settlement in September 2017.

But many observers, The Lens among them, feel that the industry could do so much better. A longer settlement cycle means that buyer and seller have a longer default risk exposure to their trade counterparty. DTCC, the US post-trade infrastructure specialist, is one of a number of firms that has been exploring ways to accelerate the settlement cycle and there is little from a technology standpoint that prevents this happening.

Rather, the barrier lies in pushing the market from its T+2 comfort zone and requiring trading parties to fulfil their settlement obligations faster after trade execution. This is as much about working culture as it is about technical constraints. We have an industry that talks a big game of ‘digital transformation’ but is sometimes slow to address its fundamental inefficiencies.