Skip to main content

Ask the Expert: Same Day, Every Day - How Same Day Settlement Works at DTCC

By Michele Hillery, DTCC General Manager of Equity Clearing and DTC Settlement Service | 5 minute read | April 19, 2021

Q: What are DTCC’s capabilities for same-day (T+0) settlement?

DTCC’s equities clearing and settlement subsidiaries, National Securities Clearing Corporation (NSCC) and The Depository Trust Company (DTC), have the operational capability to clear and settle transactions same-day, on T+0 with existing technology, even though the current U.S. equities settlement cycle is T+2 (two business days after the trade is executed). In fact, DTC is already a T+0 platform and settles transactions on a near-instantaneous basis. More than one million same-day transactions are introduced and processed at DTC every day.

Q: What are the functions of DTC and NSCC?

NSCC clears, nets down to a single position, and settles virtually all broker-to-broker equity, corporate, and municipal bond and unit investment trust (UIT) trades in the U.S. markets. NSCC also guarantees trade completion in the event that one or both parties to a transaction defaults.

DTC, on the other hand, is a depository – the central hub where all securities positions are held in the U.S. It also settles bilateral transactions, such as certain institutional trades, that do not pass through NSCC.

Q: How does NSCC support same-day settlement?

NSCC processes same-day settlement for transactions received prior to 11:30 a.m. ET. While NSCC has the capability to extend the deadline to later in the day, such a move would require industry demand, coordination and alignment, and regulators must be engaged.

Having a same-day settlement deadline supports client operations and maintains availability of netting, a critical tool that makes the US capital markets the most efficient, lowest cost and deepest in the world. Each day, netting occurs throughout the morning in hourly batches up to the 11:30 a.m. ET deadline. Following each netting process, NSCC automatically sends these netted positions to DTC for near-instantaneous settlement on the same day.

Netting is an important function in financial markets as it enables a firm’s buy orders for a particular security to be automatically offset 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, down to a single net debit or a net credit. Every day, netting reduces the value of payments that need to be exchanged by an average of 98% across all settlement cycles. On an average day in 2020, DTCC netted down $1.77 trillion dollars in total trade activity to a final settlement value of just under $38 billion.

HOW IT WORKS - Same Day Settlement at DTCC

Q: How does DTC support same-day settlement?

As mentioned, any transactions that are provided to NSCC by 11:30 a.m. ET are processed same-day and then sent to DTC for near-real-time settlement.

But it’s worth noting that not all transactions pass through NSCC. DTC has another important function in that it also provides settlement for trades that don’t go through clearing (and therefore bypass NSCC), including institutional trades, securities lending transactions and broker-to-broker transactions. These are typically bilateral transactions, in which two firms settle trades directly with one another. This is already done today, using existing technology, and doesn’t require new technologies like distributed ledger technology. These transactions can include money and securities transfers between DTC members – typically custodian banks and broker/dealers. Again, DTC processes over 1 million same-day transactions each day, with many settling almost instantly.

Q: In today’s world of one-click purchasing, why aren’t all trades settled in real-time?

First and foremost, if you’re settling trades instantaneously, you’re losing the benefit of netting. As I mentioned earlier, without netting you’re increasing risk and straining liquidity.

Second, real-time settlement would require that all transactions be immediately paid in full by investors, with cash in hand and securities owned for each trade, at the very moment it’s executed. However, as many people buy securities on margin (which is a loan from the broker to the investor), brokers generally need time to arrange financing to pay for these securities.

Finally, let’s consider the end investor. Current market structure allows NSCC to guarantee completion of the trade, even if one party defaults. As the clearinghouse, we can give buyers the peace of mind that they’ll get their shares, and sellers the confidence that they’ll get their money.

If you’re making a trade with a stranger in a real-time settlement scenario, you have no assurance that person will make good on their end of the deal. And because the clearinghouse isn’t involved, you have no recourse if the trade fails.

Q: If transactions can already be processed via NSCC and DTC on the same day, and in some cases instantaneously at DTC, why is DTCC advocating for the U.S. settlement cycle to officially move to T+1?

DTCC stands ready to support an industry move of the standard settlement to cycle T+1, or even further to T+0. That said, industry consensus indicates a move to T+1 is preferable, given the complex changes required to existing business process if the industry elected to move to T+0. Further, unlike a real-time scenario or even a same-day scenario, a T+1 settlement cycle would still ensure that market participants can purchase equities using margin, or loans, from brokerages, as brokerages would have enough time to arrange financing. It would also allow the industry to retain the benefit of netting.

DTCC is currently building industry support for shortening the U.S. settlement cycle to T+1. If you haven’t seen it yet, we recently outlined an industry roadmap for moving to T+1 by 2023, which would bring major advantages including increased capital and operational efficiencies, significant risk reduction and a lowering of margin requirements, especially during times of high volatility and stressed markets.

Q: What else is DTCC doing to create greater efficiency in the settlement cycle?

DTCC continues to explore additional ways we can add efficiency to the settlement cycle. In early 2020, DTC reengineered its night cycle processing, which produced greater operational and capital efficiencies, improved intraday settlement finality, and delivered substantial savings in the form of lower transaction costs. In May 2020, DTCC announced Project Ion, exploring whether the digitalization of assets and application of distributed ledger technology (DLT) can accelerate settlement and reduce cost and risk for the industry.

Michele Hillery
Michele Hillery DTCC General Manager of Equity Clearing and DTC Settlement Service