After 2008 financial crisis, there has been increased stress on reducing the reduced counterparty risk and operational risk. T+2 is not a regulatory mandate in the United States, it is an industry effort that is expected to yield significant benefits like decreased capital requirements, reduced margin and liquidity demands, and increased settlement.
How the world is moving towards the shortened settlement cycle
Impact of T+2 initiative on the markets
The T2 Initiative would affect not only the US financial market in a big way as all market participants with clients outside the US will need to ensure that cross-border securities transactions are settled on T+2. They will now have one less day to complete the pre-settlement stages of the trade lifecycle with even greater focus required on positively affirming trade details on the trade date.At the same time, the operational departments in the industry will need concentrate more on in the coming months to ensure that firms are prepared for the T+2 settlement cycle.
The top areas that would be impacted because of T2 initiative
- Corporate action processing /Asset Servicing functions
- Trade processing/Affirmation needs to be done one day earlier.
- Fail management
- Regulatory Reporting ( Reg T/ FINRA reporting, etc.)
- Margin Management (One less day to calculate the margin call)
- Shorter window to recall stock from the loan so the Sec Lending and Collateral management functions.
- Cash management – as the customers would leverage electronic funds payment/ACH processing
How is Trade processing going to change?
Why T+2 why not T+1, T +0?
Possible reasons why the industry is sticking to T+2 and not moving to T+1 or T+0 is the cost of technology upgrades are expected to be significantly higher and for small and mid-tier brokers may not find it financially feasible. There would be a challenge with wider agreement among different countries to accept common standards, such as the FIX protocol and SWIFT also the real time processing of back office operations which ‘s hard to achieve currently as there are other regulatory requirements to implement.
Estimated cost for moving from T +3 to T+2 is