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DTCC Takes on T+2 SettlementQ AANDby Eugene GrygoNeil Henderson, managing director of clearing for the DTCC, says that T+2 may require regulatory changes.Post-trade services utility the DTCC has stepped up its efforts to move the industry to a shorter, T+2 settlement cycle for U.S. equities, corporate and municipal bonds, and unit investment trust trades. Neil Henderson, the DTCC’s managing director of clearing, is helping lead the charge and took a few minutes to answer FTF News’ questions.Q: Does the industry need a regulatory mandate in order to get it to move to T+2?A: A shortened settlement cycle may require changes to the current regulatory framework. The requirement for new/updated rules and regulations would be identified or proposed once DTCC and the industry begin to define the business requirement and best practices to shorten the settlement cycle.DTCC will also continue to provide information and updates on the initiative to its supervisors — SEC, Federal Reserve Bank of New York and the New York State Department of Financial Services — and the Municipal Securities Rulemaking Board (MSRB), Financial Industry Regulatory Authority (FINRA) and other regulatory authorities required to move this initiative forward.I would like to emphasize the U.S. shortened settlement initiative is a collaborative effort between DTCC and industry constituents.DTCC will continue to partner closely with market participants and industry organizations on the U.S. shorter settlement cycle initiative as a steering committee and working parties are formed, and as decisions are made around approach and timelines.Q: Howdoyourespondtofirmsthatarefocusedonmeeting regulatory reforms and would prefer to put off a switch to T+2 settlement because it will be a major effort?A: Some firms have expressed concerns that the shortening of the settlement cycle ... may be in contention with other initiatives underway, including those driven by regulatory reforms.We will work with the industry to arrive at an implementation timeline that recognizes these concerns and avoids any disruption.Q: What are likely to be the costs of moving to T+2?A: The Boston Consulting Group estimated the industry cost to achieve T+2 to be $550 million.Annual industry operational cost savings — from implementing the BCG-defined enablers/building blocks — are estimated to be $170 million for T+2, depending on the adoption of the defined enhancements, and capital savings arising from reduced NSCC [National Securities Clearing Corp.] clearing fund requirements are estimated at $25 million.The payback period for implementing the BCG-defined enhancements is roughly three years for T+2. Factoring in estimated benefits for reduced loss exposure in significant default scenarios decreased the payback period dramatically.Q: What are the short-term benefits of the T+2 move?A: The DTCC has conducted several studies on the costs and benefits of a shorter settlement cycle, looking closely at T+1 or T+2 time frames.In both cases, the following benefits were identified:• Mitigating systemic risk by reducing counterparty exposure, pro-cyclicality and liquidity risk both from a clearing agency and member perspective.• Lessening member funding requirements at NSCC by reducing risk exposure.• Providing cost savings and efficiency as a result of the operational changes that would be put in place to enable a shorter settlement cycle.• Alignment with international cycles as European member states move to T+2 by January 2015; many EU countries are already stating their intention to move by Oct. 6, 2014. Many markets in Asia-Pacific are already on T+2 or T+1 or are evaluating a move.29FALL 2014 | FTF NEWS MAGAZINE