Shorter settlement cycle should reduce risk, cut costs says Fitch

Most transactions must now be settled within 2 business days

Shorter settlement cycle should reduce risk, cut costs says Fitch
Steve Randall
Most financial products in North America are required to settle transactions within two business days of the transaction as of this week.

That's good news for trading firms, banks, broker-dealers and buy-side firms says ratings agency Fitch.

The reduced settlement cycle for the US and Canada from three days (T+3) to two 2 days (T+2) includes corporate bonds, municipal bonds, unit investment trusts and other financial instruments comprising those securities.

Fitch says that T+2 means reduced operational and systemic risks between each party and although there could be some operational challenges initially, over the long term it should mean cost savings.

Trust and processing banks and broker dealers could be winners from lower capital requirements for margin or clearing funds. An estimate from The Boston Consulting Group suggests a 15%-24% decrease for margin/clearing fund requirements.

However, there are initial costs of $616 million estimated for the industry to transition. With savings of $190 million per year, that should be reclaimed within 3-5 years.

North America is following Europe in transitioning to T+2. When that region shortened settlement times in 2014 there were mixed operational outcomes.

One survey showed an improvement in failed instructions and just one showing a modest increase. However, smaller buy-side firms were among those facing additional efficiency challenges and pressure to settle within the shorter time.