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Is the Industry Ready for T-0 Settlement

By Murray Pozmanter, DTCC Managing and Head of Clearing Agency Services and Global Operations and Client Services | June 22, 2018

Turning User Feedback Into Improved Market Insights
Murray Pozmanter (l) discusses DTCC’s Settlement Optimization initiative during a panel at SIFMA Ops.

At the SIFMA Ops 2018 conference in Phoenix, I joined a panel of operations leaders to discuss, among other topics, how industry initiatives can drive greater efficiency and reduce risk.

I’m very pleased to report that we are exploring several ways to optimize settlement and further shorten the trade settlement cycle beyond T+2, reducing risk and costs for clients. In our recent white paper, Modernizing the U.S. Equity Post-Trade Infrastructure, we offer two key proposals - Settlement Optimization and Accelerated Settlement. Each build upon existing DTCC capabilities to significantly reduce capital requirements, mitigate systemic risk and lower operational costs, all while still preserving the resiliency of the current infrastructure.

Settlement Optimization proposes an alternative settlement model through the introduction of four primary processing enhancements. While each of the Settlement Optimization enhancements offers its own set of unique benefits, taken together these enhancements contribute to a more holistic and streamlined settlement process.

During the conference we discussed the industry’s pace of change and desire to move more quickly toward T-1 or T-0. In fact, the results of an audience poll revealed a preference for T-0.

But with this change comes several considerations, namely cyber security concerns and regulatory requirements. Additionally, there’s also the financial reality that not all trades are done with the immediate availability of the seller’s security, or the buyer’s cash, to achieve real time trade by trade settlement so a margin call is essential.

One solution is to re-engineer the night cycle toward a T-1-and-a-half, or T-1.5, so a trade that occurs, for example on Monday, can be processed overnight and settled Tuesday morning. If we can get settlement finality on all transactions that clean up overnight we can take that settlement into account for that morning’s margin call. That way it’s virtually a T-1. DTCC’s re-engineering of the night cycle will occur in the third quarter of next year.

This initiative is part of our overarching strategy to shrink the period between trade and settlement; not just in terms of settlement optimization, but also in getting from T-2 down to T-1 and where some want it to be at T-0.

That’s one of the reasons we’re focusing on how much we can reuse or rearrange the existing process to extract as much risk and as much time out of the settlement cycle as possible without having to do a radical reengineering. A radical reengineering is in our future, and we’re going to work very closely with the industry to define what that means technologically, but that’s not a three-to-five-year answer.