As the industry embarks on a move to accelerated settlement, it helps to look back at the steps taken in 2017 when settlement was shortened to T+2. Since that time, DTCC has been working to gauge industry interest on shortened settlement, first in 2018 with a white paper about settlement optimization, and then again in 2019 with strategic initiatives aimed at implementing functional changes to modernize DTCC’s core systems.
Our strategic efforts around modernizing systems and processes led to the establishment of an industry working group to address 20 significant improvements to equity clearance and settlement. The working group represented a cross-section of the industry, including both institutional and retail broker/dealers, custodians, regional banks, buy-side and service providers. These meetings began in the fall of 2020 and were dominated by the topic of accelerated settlement, especially as industry stakeholders managed a spike in market volatility, including increased margin requirements at NSCC.
In January of this year, DTCC proposed a roadmap to implement accelerated settlement to T+1 with the white paper, “Advancing Together: Leading the Industry to Accelerated Settlement.” Although there was discussion around T+0, it was concluded that a move to T+1 could be more realistically achieved by the industry. The paper prompted SIFMA and ICI, DTCC’s industry partners in the 2017 effort to shorten settlement, to engage and make a formal recommendation around a further acceleration of the standard settlement cycle, a move to T+1.
To achieve T+1, post-trade agreement needs to happen faster, this is achieved through increased efficiency in the allocation and affirmation processes.
SIFMA started industry working groups to understand the challenges of a shortened settlement cycle and what areas needed further analysis. Ultimately, a decision was made to begin the work needed to move the industry to T+1 and a joint DTCC/ICI and SIFMA press release was issued. Leveraging the industry structure established for the move to T+2, an industry steering committee was established to provide guidance to the overall project, however, the bulk of the work is being done by a working group of 200 industry representatives, who have been participating in daily discussions to develop the industry playbook, identifying challenges and constructing an implementation timeline.
The Role of ITP in Accelerated Settlement
The working group has also been addressing the crucial processes with Institutional trades that sit at the top of the securities transaction funnel. To achieve T+1, post-trade agreement needs to happen faster, this is achieved through increased efficiency in the allocation and affirmation processes.
The move to T+1 aligns with DTCC Institutional Trade Processing’s (ITP) move to fully support U.S. trades via a single global central matching platform, CTM. The industry standard CTM platform – with its community of over 1500 buy and 1200 sell-side firms – provides significant operational efficiency and direct integration with DTC settlement. Its enhanced central matching workflow boasts a 95% average same day matching rate, settlement notification, and trade enrichment from DTCC’s ALERT with access to a growing resource of 11 million SSIs.
Currently, the affirmation process for a U.S. Institutional trade is performed via TradeSuite, trades affirmed prior to affirmation cutoff at 11:30 AM on T+1 are sent to the DTC for settlement; for prime broker flow, trades are sent to NSCC’s continuous net settlement (CNS) for netting. Trades that don’t make the affirmation cutoff are processed as delivery orders (DOs), a less efficient and more costly process.
Analysis has shown that unaffirmed trades are 54 times more likely to result in a trade not being authorized by the counterparty in the trade settlement process at DTC, than affirmed trades. These unauthorized trades create significant friction and translate to greater human capital and monetary cost to research the trade. In a move to T+1, those friction points will need to be addressed to ensure that trades settle on a timely basis.
T+1 and CTM’s Match to Instruct Workflow
In moving to a T+1 settlement, the working group estimates that an affirmation cutoff of somewhere between 7 PM and 9 PM on trade date is needed. Using current production data, 55% of trades are now affirmed by 7 PM, and 68% by midnight on trade date. If the matching component is removed, the data shows further deterioration in affirmation rates.
These points highlight the challenges for the industry to achieve T+1. However, the data improves to near 100% by 10 PM with both parties utilizing CTM and its Match to Instruct workflow.
With CTM’s Match to Instruct workflow, the match between the Investment Manager and the Executing Broker automatically triggers the affirmation of the trade and delivery directly to DTC, eliminating the need for either party to take any further action.
Much more to come as the working groups continue their efforts, the good news is there are tools available today to help make T+1 achievable.