The move to T+2 settlement for securities markets in Canada and the United States is expected to reduce systemic risks, enhance efficiency, and reduce costs over the next several years, says Fitch Ratings in a report published Tuesday.
Shortening the settlement cycle for most financial products in Canada and the U.S., which takes effect today (Sept. 5), “will reduce operational and systemic risks” between industry counterparties, the report says while also improving the financial system’s capital efficiency, and reducing costs.
“Over the long term, this should result in cost savings for trading firms, including trust and processing banks, broker dealers and buy-side firms,” the report says, although there is some initial operational risk due to the change in processes and industry infrastructure required for a shorter settlement cycle.
Overall, the move to T+2 will enhance capital efficiency, the report says, “as central counterparty margin is reduced, allowing firms to put capital to better use.” Banks and broker dealers could particularly benefit from lower capital requirements, it adds.
Additionally operational efficiency will improve, andcounterparty risk will be reduced for retail brokers, institutional brokers, and actively managed buy-side firms (such as hedge funds, and other alternative investment managers, etc.) as trades settle more quickly, according to the report.
On the cost side, Boston Consulting Group (BCG) estimates the total investment required to upgrade infrastructure to meet T+2 settlement is US$616 million, and that cost savings are estimated at US$190.5 million per year, “which means that infrastructure upgrades would have a payback period of a little over three years,” the Fitch report says.
Despite all of the expected benefits, implementation risks also remain. When Europe transitioned to T+2 in 2014, “the operational track record was mixed,” the report says.
In particular, between 35% and 45% of European Union clients, including small buy-side firms, had efficiency problems following the move to T+2, according to the report, and regulators found that pressure on the post-trade process had increased.