Shortening the Equity Settlement Cycle: Prospects, Hurdles and Goals of a Global Move to T+2

1. Shortening the Equity Settlement Cycle:   Prospects, Hurdles and Goals of a Global Move to T+2 March 2011

2. Potential Cons • Liquidity – Potential for increase in fail rates due to lack of “funding” – cash/securities (stock lending) • Foreign exchange – clearly the FX market is T+2 so delays in trade instructions will make T+2 unworkable, particularly for cross border trades from other time zones. • Operational risk – CSDs will need to adjust systems to reduce the settlement cycle. • Collateral exposure - collateral required will be reduced but extreme pressure will be placed on local brokers as they are required to finance settlement (nb Germany) • Financial impact • Increase costs and capital for banks financing intraday and overnight lines for clients • Unwillingness of investors to allow liens or security interest over their assets is growing • Changes to market procedures - as a result of the need to harmonise fail management mechanisms.

3. Potential Pros • For Cross-border trades: • Reduction in collateral the ECB see this as key because of the lack of high quality collateral - but an unforeseen consequence will be funding – costs and availability • Reduce costs – in the long term by achieving STP in matching and settlement. • Increase efficiency - achieved through harmonisation of the settlement cycle. • Facilitate processing of corporate actions – by having a harmonised cycle across countries. • Settlement of multi-listed securities • For local trades: • Reduced counterparty risk – a shorter settlement cycle reduces the length of exposure to the counterparty of a trade but it needs to be financed • Liquidity risk – Reduction in level of collateral as a result of a shorter period.

4. Issues / challenges • Counterparty credit risk – reduction of one day but this needs to be financed • Matching – Affirmation process must take place within a short timeframe. Virtual Matching Utilities help reduce this timeframe (Example: Canada) • same day affirmation; • trade date matching; and • harmonisation of matching criteria. • Harmonisation of settlement fails regimes • FX – Foreign exchange in local currency must be in place in time for settlement. • Costs – Getting all market participants ready (especially small players) • Time-zone differences – For cross border trades, time differences can be an issue (when it is T+1 in the Americas, it is T+2 in Asia Pacific). • Legal and regulatory – Regulatory approval may be required for a change in settlement cycles, CSD rules and procedures would need to be changed.

5. Examples • Europe • The European Commission's Expert Group on Market Infrastructures (EGMI) is investigating the implications of mandating the harmonisation of settlement cycles for equities and bonds through its Harmonisation of Settlement Cycles Working Group. • German T+2 – but generally large brokers exist in the market • Middle East & Africa • Egypt moved the settlement cycle for equities from T+3 top T+2 in May 2007. • Asia Pacific • Pakistan moved from a T+3 to a T+2 cycle in August 2007 • Taiwan moved to a T+2 cycle in February 2009 • India moved to T+3 cycle in April 2002 and to a T+2 cycle in April 2003. • Americas • Venezuela – on-exchange equities settlement cycle was changed from T+3 to T+2 in July 2009 • Argentina – operates optional settlement cycles T+0, T+1, T+2 and T+3.