There was an interesting discussion at the Global Custody Forum yesterday, where I chaired a panel session on settlement cycles. While the migration to T+2 in Europe has gone extremely smoothly, there is now a difference between settlement periods in Europe (T+2) and the US (T+3). This is likely to persist for a few years, even after the US decides to move to T+2. Clearly, there is a trade-off between reducing risk wherever possible by shortening settlement cycles, versus increasing costs and possibly risks by introducing inconsistencies between cycles in different markets. There was a poll of the audience on this question:
Which approach do you prefer?
A. The shortest possible settlement cycle for each market, even if they are all different.
B. Consistent settlement cycles across markets, even if they are not the shortest.
The result was a clear preference for consistent cycles (79% of votes) rather than the shortest (21%).
We then discussed the question of what the ultimate objective should be: T +0, meaning settlement on the day the trade is dealt, or T+1. On the panel, there was a clear sense that T+0 would be too difficult. There are operational matters that need to be arranged between trade and settlement – these will be dealt with in due course through improved technology that combines trade matching and settlement matching – but the more serious obstacle is the need to ensure that securities and cash are in place in time for settlement. If the market does not want to require pre-funding (meaning that cash and securities need to be put in position before trading), then T+0 settlement will be unattainable. Indeed,we heard that a large part of the reason why the Russian market moved from T+0 settlement to T+2 was that foreign participants in the market found it very difficult to position securities or cash in time for settlement on the same day as trading. As a result, trading volumes increased after the settlement cycle was lengthened (although they have subsequently fallen because of the geopolitical developments).
An audience poll, however, showed a surprisingly large number of people wanting to aim for T+0 settlement, even after hearing the panellists’ comments:
What is the ultimate goal for settlement cycles (in securities markets)?
T+3 or longer: 4%