DTCC's Abel flags three hurdles to US shift to T+2

Despite what seems like a tight timeline, the DTCC's John Abel says there is some leeway as long as firms are willing to do a bit of homework before the official regulation is published

DTCC's John Abel

After years of talk and speculation, it seems the US securities market has finally taken a step towards reducing its settlement cycle to two days (T+2). The release last week of a proposed timeline for a T+2 shift in the US by the T+2 Industry Steering Committee (T+2 ISC) puts some legitimacy in the talks that have taken place across the industry for years around shortening settlement times.

John Abel, vice-president of product management, settlement and asset services for the Depository Trust & Clearing Corporation (DTCC), which organised T+2 ISC, tells WatersTechnology.com, Risk.net's sister site, that the process for putting together the timeline was very structured. T+2 ISC spoke with more than 600 industry members in 12 market segments before developing its timeline, which states the US could be on a T+2 cycle by the end of Q3 2017.

“After the working groups identified all the necessary industry changes, we asked the working group members to go back to their development teams and actually scope what it would take and how long it would take to do those builds,” Abel says. “The estimate on how long it will take to do a build is based on the changes that need to be done.” 

Three challenges

For now, though, T+2 ISC's proposed timeline is simply a suggestion. There are still multiple hurdles that need to be cleared before T+2 becomes a reality. Abel says getting the industry to T+2 really boils down to three big issues.

First, regulators need to show that T+2 is a priority. Financial frms are not likely to start building any type of technology until they know exactly what will be required of them to remain compliant.

It’s really contingent upon how much work a firm can do without regulatory certainty... I think most firms will do some pre-work

Abel says he has heard from several firms that they will not commit to doing any type of build until there is some regulatory certainty and there is a clear understanding of the changes that need to be made. For this reason, getting the regulators on board early is vital to the transition to T+2.

According to Abel, regulators are aware of the industry's dependency on their buy-in.

“We have ongoing dialogue with the regulators and, in general, they’re supportive of the initiative,” Abel says, but adds that the supervisors have not committed to the time frames outlined in the paper.

The next challenge is the actual build. Every firm will likely need to implement or upgrade some technology. At the very least, a firm will need to do an analysis of their systems, according to Abel.

Naturally, this type of build will not be cheap. A cost-benefit analysis of a move to T+2 done by Boston Consulting Group in October 2012 showed the industry would need to make an investment of $550 million. Abel says that number likely is not relevant anymore and another goal of T+2 ISC is to put together a more accurate figure.

Finally, after the regulatory buy-in and system build, industry-wide testing will also need to take place. The plan would be to start testing around the end of Q1 or beginning of Q2 2017, according to Abel.

Tightrope

One potential flaw in the T+2 implementation date of Q3 2017 is what appears to be the small margin for error. According to the timeline, regulators would need to publish a proposed set of rules by Q4 2015 and have those rules finalised by Q2 2016.

Abel says it is possible to hit the Q3 2017 deadline, despite slight delays. Even if regulators are slow to confirm requirements and implementation dates, companies can do some work analysing and preparing their systems for T+2 beforehand.

As noted earlier, Abel doubts any financial firm would be willing to write code for a system before regulatory guidance is passed down, but he does think companies could spend time understanding the industry-level requirements, translating those into business-level prerequisites and spelling out what business changes need to be made to the firm.

“It’s going to be on a firm-by-firm basis. It’s really contingent upon how much work a firm can do without regulatory certainty,” Abel says. “I would be surprised if firms didn’t act at all until the final rule set came out. I think most firms will do some pre-work.”

This article first appeared on sister website WatersTechnology.com.