Investors gain in US move to shorten settlement cycles

WHILE the move by the United States in September 2017 to shorten the time it takes to settle stocks and bond trades by one-third didn't receive much fanfare outside of the financial industry, it was a significant milestone that directly benefits individual and institutional investors here in Asia and globally.

By shortening its settlement cycle for stocks and bonds from three days to two days, known as "T+2", the US has substantially reduced operational and counterparty risk across the industry, allowed investors to receive their cash faster and aligned its settlement cycle with other major markets across the globe.

Cutting the time between when a trade is executed and when the buyer must make payment, and the seller must deliver the security, has been a key industry focus in recent years because of its ability to make markets safer and more reliable. This is because it reduces the time that a person or an institution on one side of a trade is exposed to the risk of the other side to trade defaulting, such as in a Lehmann's type scenario. T+2 has largely become the settlement time standard.