Starting 6 October 2014, securities tradable on SIX Swiss Exchange and SIX Structured Products Exchange and settling through the Swiss central securities depository SIX SIS will settle after two business days.
By René Bösch/Benjamin Leisinger (Reference: CapLaw-2014-12)
On 4 March 2014, the SIX Swiss Exchange Ltd. (SIX) announced that starting 6 October 2014 the settlement cycle in Switzerland will be reduced from three business days (T+3) to two business days (T+2). This accelerated settlement refl ects the so-called shortened settlement cycle (SSC) that is also under consideration in the United States and throughout Europe. In the European Union (EU), for example, the ordinary settlement cycle for securities transactions in regulated markets and Multilateral Trading Facilities (MTFs) shall be shortened to two days in accordance with the European Commission’s Central Securities Depositories Regulation (CSDR) as of 1 January 2015. Ahead of the intended harmonization of settlement periods in the EU, the settlement periods currently differ substantially from jurisdiction to jurisdiction. The standard settlement period has been T+3 in almost all markets in Europe, except for Germany, Slovenia and Bulgaria where it is already T+2. For government bonds, corporate bonds and OTC transactions, a broad diversity exists, including some instruments settling on T+0.
A shorter settlement period seeks to reduce certain critical risks and concerns that had been identifi ed in the financial crisis and its aftermath. Such risks include in particular the settlement risk; further concerns relate to ineffi ciencies regarding capital allocation and the costs of ineffi cient settlement processes. The main benefi ts for investors arising from a shorter settlement cycle are the reduction of counterparty risks and a reduction of the period during which they may need to post collateral with Central Counterparties (CCPs). A consultation of industry participants such as banks and other market infrastructures, as well as investors, public authorities and issuers in the context of the CSDR revealed that almost all respondents shared the view that settlement processes play a systemically important role for financial markets.
A study by the Boston Consulting Group (BCG) also showed that the majority of the market participants would support the SSC. A T+0 settlement was generally viewed as infeasible for the industry while a T+2 settlement was found to be possible by compressing timeframes and corresponding rule changes. A cost benefi t analysis by BCG showed that the benefi ts of T+2 settlement would be much higher relative to the costs as compared to a T+1 settlement. In the EU, the T+1 settlement option was also discarded as not feasible mainly because many Central Securities Depositories in Europe start their settlement process at 7pm the preceding evening wherefore T+1 settlements would imply that the settlement process starts on the same day as the trade day. It was held that this would put too much pressure on the back offi ces of markets infrastructures. Also, T+1 settlement was said to potentially create signifi cant problems for investors who either use a different currency, because FX spot transactions typically settle on a T+2 basis, or who may be located in different time zones.
The switch in Switzerland to T+2 settlement not only impacts the settlement cycle of actually traded securities. In addition, the SIX regulations on short selling, in particular Section VI of “Directive 3: Trading” of the SIX Swiss Exchange and SIX Structured Products Exchange have been supplemented with effect from 11 November 2013 requiring sellers to generally settle the short sale at the latest upon execution of the trade. According to the Rule Books of the SIX, such execution and the payment of trades had to occur three trading days after the trade itself (T+3). Following the implementation of the shortened settlement cycles in Switzerland, short sales would have to be settled at the latest T+2.
Another area where the change from a T+3 to T+2 settlement cycle could potentially have an impact is the notifi cation of shareholdings under article 20 of the Stock Exchange Act (SESTA). Article 18 of the Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading (SESTO-FINMA) provides that banks and securities dealers are exempted from notifi cation requirements for equity securities and financial instruments which they, amongst other requirements, hold exclusively and for a maximum of three trading days for the purposes of clearing or settlement. Because of the regulatory background of this exemption, namely to allow banks and securities dealers to hold these positions for technical reasons in the context of clearing and settlement within the normal settlement cycle, one can expect a change of this provision in the foreseeable future to adapt it to the new T+2 settlement cycle. Additionally, the change to the T+2 settlement cycle could have an impact on parties relying on the so-called intraday-exemption, for example if the acquisition transaction ordinarily settles on a T+2 settlement basis and the sale transaction contractually settles on a T+3 settlement basis these settlement cycles will need to be aligned.
To sum it up, the acceleration of the settlement cycle from three to two business days is expected to bring the benefi ts outlined above and will contribute to the harmonization of settlement cycles throughout the EU and with the Unites States. However, market participants active in short selling and/or intraday transactions with respect to securities listed at SIX Swiss Exchange or SIX Structured Products Exchange should note that this change could impact the way their trades will have to be executed after 6 October 2014.