Frequently Asked Questions

A: Time to settlement equals counterparty risk, and margin requirements, which are designed to mitigate those risks, represent cost to members. The immediate benefits of moving to a T+1 settlement cycle could mean cost savings, reduced market risk and lower margin requirements.

Today an average of over $13.4 billion is held in margin every day to manage counterparty default risk in the system. Shortening the settlement cycle would help strike a balance between risk-based margining and reducing procyclical impacts. In one significant finding in the paper, our risk model simulations have shown that the Volatility component of NSCC’s margin could potentially be reduced by 41% by moving to T+1, assuming current processing and without any other changes in client or market behavior.

A: One of NSCC’s primary roles in the industry is netting — the automatic process of offsetting a firm’s buy orders for a particular security against its sell orders for that security. Netting consolidates the amounts due from and owed to a firm across all the different securities it has traded to a single net debit or a net credit.

Allowing trades to “net” settle reduces the total amount of cash and securities that have to go back and forth throughout the day and eliminates a significant amount of operational and market risk. By netting down or reducing the total number of customer trading obligations that require the exchange of money for settlement, NSCC helps to minimize risk and free up trillions of dollars of capital each year. Every day, NSCC netting reduces the value of payments that need to be exchanged by an average of 98-99%.

A: Real-time settlement is a simple technical solution but a very complicated market structure change. While the industry should continue to aspire to real-time, it is more pragmatic to reduce the settlement cycle in stages to capture the benefits faster. With real-time settlement in today’s market structure, the entire industry – clients, brokers, investors – loses the liquidity and risk-mitigating benefit of netting, and that is particularly critical during times of heightened volatility and volume. For example, on a typical trading day, NSCC processes an average of about $1.7 trillion in equities transactions. The multilateral netting process reduces that number by about 98%, and the total value settled is around $38 billion. Netting allows brokerages to transfer that $38 billion between parties only once at the end of the day. In a real-time settlement scenario, netting is not possible and trillions of dollars in cash and securities must move through the financial system on a continual basis throughout the trading day. This creates massive market and capital inefficiencies, increases credit and operational risks, and increases costs between trading parties, possibly undermining the stability of the markets.

Accelerating settlement requires careful consideration, industry coordination, and a balanced approach so settlement can be achieved as close to the trade as possible (for example, T+1 or T+½), without creating capital inefficiencies and introducing new, unintended market risks, such as eliminating the enormous benefits and cost savings of multilateral netting.

A:DTCC is prepared to move quickly to lead the industry to accelerate the settlement cycle to T+1 and beyond. NSCC and DTC already support T+1 and even some same-day settlement using existing technology, though many market participants do not use this option due to market structure complexities, legacy business and operational processes. Many don’t realize, DTC has always been a T+0 settlement platform ever since its inception in 1973 -- even when the industry settled at T+5, T+3 and now T+2.

As we describe in the paper, in our discussions with the industry, many firms appear ready to start revising their processes to accelerate settlement. They realize it’s in their best interest: shortened settlement times reduce market risk and margin requirements, which would allow firms to use those resources in other ways.

Equity clearing and settlement is part of a much larger ecosystem of linked financial markets. Accelerating the settlement cycle would have upstream and downstream impacts on other parts of the market structure, including derivatives, securities lending, cash borrowing, foreign exchange and collateral processing, and developing a new accelerated settlement system could fundamentally change current market structure. In order to move to T+1, industry participants must align and implement the necessary operational and business changes, and regulators must be engaged .

A: The T+1 proposal has been discussed ever since the industry made the move to T+2, but the sense of urgency really comes amid periods of tremendous market volatility over the last several years. A T+1 settlement cycle will significantly increase market efficiency and mitigate market and counterparty risk, particularly during times of extreme volatility. The reduction in risk results in a reduction in margin requirements freeing up member capital.

A: Accelerating the settlement cycle to T+1 will require industry participants to migrate to more efficient ways of transaction processing including further automation and the adoption of industry standard. In addition to improving each firms individual processing efficient, these improvements have the added benefit of improving the efficient for the entire industry.

A:The primary benefits of the move to T+1 are risk reduction and operational efficiencies. Studies have been done that show the risk reduction for NSCC activity is approximately $41% of the VaR component of the NSCC margin requirement. This translates into billions or dollars in margin reductions to members. Similar risk reduction exist for buyside firms although those values are more difficult to quantify. Operational efficiencies will be gained by participants adopting industry standard and recommended industry solutions and by improving process flow. The costs associated with the move to T+1 is expected to vary by firm depending on levels of automation and existing business mix.

A: Accelerating the settlement cycle to T+1 will require industry participants to migrate to more efficient ways of transaction processing including further automation and the adoption of industry standard. This includes improvements that promote STP and reduce transaction fails.

A: The industry move to T+1 will impact netting and liquidity across the industry. The timing of industry netting processes will change. These changes are outlined in the T+1 overview document published in December. The impact of a move to T+1 on liquidity will vary depending on each firm’s induvial transaction mix and existing liquidity procedures. Industry participants are encouraged to carefully review their individual processes and adjust as needed.

A: During the industry move from T+3 to T+2, the industry carefully monitored corporate action events around the conversation date and provide guidance were needed. The industry will take a simar approach during the move to T+1. Whether issuers and agents will be able to suppress corporate action events around the conversation date remains to be seen.

A: Please see the T1 Executive Summary Paper, where this is an extensive section on New Issues and IPOs.

A: Currently, the Canadian market is the only market that has formally announced a move to T+1 in conjunction with the US. A number of other markets are currently exploring a similar move but none have announced any formal plans.

A: The move to T+1 in the US will require market participants evaluate their processes for supporting international clients and FX. There are a number of existing markets in the US that currently settle T+1, e.g., Fixed income markets. Market participants should evaluate how existing T+1 markets are currently supported and determine what, if any, changes are required to support T+1 in the US equities market.

A: Each firm will need to determine how best to meet the US trade confirmation requirements.

A: The move to T+1 in the US will require market participants evaluate their processes for supporting international clients. There are a number of existing markets in the US that currently settle T+1, e.g., Fixed income markets. Market participants should evaluate how existing T+1 markets are currently supported and determine what, if any, changes are required to support T+1 in the US equities market.

A: There are currently no exceptions proposed for foreign investors. However, foreign investors are encouraged to work with their custodians and service providers to ensure affirmation and confirmation processing is completed by the proposed timelines.

A: DTCC is uniquely positioned to provide insights that tap into the breadth and depth of our experience. With impactful front-to-back consulting, DTCC can leverage our industry relationships and ability to offer a seamless and positive client experience. For more information about DTCC consulting services, please visit: https://www.dtcc.com/consulting.

DTCC has started the process of identifying the required changes that will be needed to help our clients and the industry as a whole as we transition to a T1 settlement cycle. These changes have been published in the T1 Executive Summary Paper which can be found at UST1.ORG.

We have dedicated teams looking at the required changes and their impact to DTCC’s overall ecosystem and its impact to our clients. Teams have been assembled to start the development work on the identified changes and we will utilize an Agile methodology to implement them.

As far as testing, DTCC is working on a T1 High Level Testing Document -- as we did in the move from T3 to T2 -- that will be presented to the industry ~ Q3 or Q4 of 2022 (subject to change) depending on the final date that is chosen for the move to a T1 settlement cycle. We will distribute this in conjunction with our colleagues at SIFMA and ICI. From there, we will again -- through the Industry Working Group -- have dedicated sessions regarding a DTCC Detailed T1 Testing Document that we are preparing but will require industry input to complete. The timing on that, again, is subject to a final date being chosen for implementation and is still to be determined.

A: Firms should be engaged and involved with the industry plans for testing. The input of the Industry Working Groups is invaluable as we move together to T+1. We plan to begin preliminary industry testing at the end of 2022.

A: We believe T+1 is achievable with the right amount of coordination, socialization, planning and testing.

A: As we have done for the past year and a half, we utilize the SIFMA, DTCC, and ICI-led working ISC and IWG groups to continue to work with the industry on open issues, timelines, regulatory issues, testing information, hosting Zoom/Webinars to ensure that the industry is engaged at every step as we make the march to the implementation of a T1 settlement cycle.

In regard to the T1 Implementation Playbook, SIFMA, ICI, DTCC and Deloitte are working together to produce the playbook and have it available for industry consumption sometime in June-Aug 2022 timeframe (subject to change). It will have the same feel of the playbook that was created when the industry moved from T3 to T2.

Firms should keep an eye on the UST1.ORG website for updates. Please visit UST1.org for all industry documentation, announcements and working papers.