After helping to usher in the industry’s transition last September to a standard settlement timeframe of trade date plus two days (T+2) for U.S. equity, corporate and municipal bonds, and unit investment trust trades, DTCC is now exploring several additional ways to modernize the settlement system to achieve further operational and capital efficiencies.
In a white paper issued earlier this year, Modernizing the U.S. Equity Post-Trade Infrastructure, DTCC put forth two innovative proposals — settlement optimization and accelerated settlement – which would enable members of National Securities Clearing Corporation (NSCC) and The Depository Trust Company (DTC) to improve workflows, optimize capital and reduce risk, further reducing settlement processing inefficiencies through automation.
If both proposals are implemented, DTC and NSCC members could get to a settlement cycle of less than trade date-plus-2 (T+2) — potentially to T0-and-a-half — without removing a calendar day from the standard transaction settlement cycle, and while still maintaining the significant benefits of centralized netting and risk management.
This alternate settlement model, called Settlement Optimization, could be achieved with the reengineering of four core settlement components:
Related: DTCC Plans First Phase of Settlement Optimization with Implementation Targeted for Next Year
The first two parts of this DTCC Connection series explored Night Cycle Reengineering and the Intraday Settlement Slice. The final part in this series now delves into both the Enhanced Asset Lending and NSCC Margin Pledge Facility proposals. These enhancements are on-hold due to bandwidth limitations on behalf of the industry and we are focusing on night cycle reengineering and the settlement slice based on member feedback.
Enhanced Asset Lending
The goal of the Enhanced Asset Lending proposal – an optional service -- would be to reduce the number of fails and aggregate securities’ borrowing needs by providing additional lending opportunities. This enhancement would allow DTC to automatically identify borrow and loan opportunities for members, and generate loan transactions as appropriate.
DTC is exploring the development of cleared and un-cleared processes for both securities lending and cash lending transactions. Cleared lending refers to transactions between two clearing members lending an NSCC eligible security, while un-cleared lending will be for transactions between one or more non-clearing members or between two clearing members lending non-clearing eligible security.
“This optional lending service could allow DTC to identity borrowing needs during the initial optimization process and could vastly reduce the number of fails and increase the night cycle settlement rates,” said John Abel, Executive Director, DTCC Settlement and Asset Servicing Strategy, Product Management Group. “While this proposal is certainly not as far along as the other aspects of settlement optimization, we are exploring strategic partnerships that could help facilitate asset lending services.”
Part IV: NSCC Margin Pledge Facility
The fourth proposed component, NSCC Margin Pledge Facility, is another optional service designed to allow members to pledge available position to NSCC as a way to reduce margin requirements and risks for NSCC and the industry overall. By comparing members’ future Continuous Net Settlement (CNS) delivery obligations and available positions, pledge recommendations will be identified including the margin impact of the pledge transaction. With this information, member will determine how to best utilize their available position. On settlement date, DTC will automatically use positions pledged to NSCC to satisfy the pledging member’s CNS obligation.
“By giving the option of automatic pledges or allowing clients to react to individual pledge recommendations, positions pledged to NSCC would be removed from the participant’s marginable portfolio,” said Jack Manuel, Director, DTCC Settlement. “This enhancement could result in a significant reduction in margin requirements, which would reduce overall risk for clients, NSCC and the industry.”
Based on support and feedback from the Settlement Optimization Working Group, DTCC is taking a phased approach to the implementation of Settlement Optimization, focusing first on the Night Cycle Reengineering proposal. Important notices were published on in early May, further explaining next steps and announcing 3Q 2019 as the targeted date for Night Cycle Reengineering implementation.
Unlike the move to a T+2 settlement cycle, no sweeping rule changes are being implemented; however, DTCC has formed an active industry Working Group with clients and other interested industry participants to ensure everyone is kept informed of progress on the settlement optimization initiative. DTC has also established a dedicated settlement optimization website as a way to consolidate and share settlement optimization related material.
“Engagement with our Working Group, as well as continued industry participation, will be vital as we get closer to launching the night cycle reengineering piece of settlement optimization,” said Abel.
To stay updated on the settlement optimization initiative please visit dtcclearning.com/optimization.