Murray C. Pozmanter, DTCC Head of Clearing Agency Services and Global Business Operations, joined industry leaders at the SIFMA FMS Virtual Conference to discuss how the current initiative to shorten the settlement cycle to T+1 will impact markets both today and in the years ahead.
Accelerating the Settlement Cycle
It was just a few years ago when the industry moved from three-day to two-day settlement. Pozmanter noted that since the settlement cycle was shortened to T+2, DTCC has been continually reviewing the impacts, systems and processes of securities settlement today, and the merits of further acceleration, including T+1, T+0 and real-time gross settlement. And the recent excessive volume and volatility was the catalyst for DTCC’s white paper, “Advancing Together: Leading the Industry to Accelerated Settlement.”
Pozmanter explained that NSCC typically clears about 200 million transactions on an average day, netting to a factor of 98%, with margins of $6 to $8 billion that DTCC collects from the industry. Between the heightened trading during the initial days of the pandemic last year, to the events surrounding the meme stock activity in 2021, market volatility and volume have skyrocketed. As a result, DTCC began to see many days with an excess of 300 million transactions. Volume peaked in January 2021 at 474 million transactions to NSCC and margin of over $30 billion. These days of increased volatility are also seen at various points in the year, including during index rebalancing.
The intensity and events of the past year were the impetus to accelerate the conversation of shortening the settlement cycle.
“Margin is based on market volatility and impacted by volume, and nothing can be done to reduce the amount of trades, but we can reduce the number of days of uncleared activity in the market,” Pozmanter said. “The white paper was in response to the industry’s call for a more efficient way to utilize their capital, and we wanted to mobilize the industry and set a realistic timeline to move to T+1.”
Industry Engagement
In response to DTCC’s white paper, SIFMA organized high-level conversations with industry participants to explore the impact of shortening the settlement cycle. In March, SIFMA, working with Deloitte, began a series of working group sessions to review key challenges of a shortened cycle with major stakeholders representing 27 SIFMA firms. These sessions covered 24 vital areas affected by a switch to a shortened settlement cycle and included affirmations and allocations, prime broker, and lending.
Based on these outputs, the recommendations were generally supportive, but further analysis was needed. This led to a joint mandate from the boards of ICI, SIFMA and DTCC and resulted in a series of discussions that began in June and will run through the end of September, covering 14 critical topics.
The move to a shortened settlement cycle has also received provisional approval from U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, as he cited a reduction in risks and costs in his recent testimony before Congress.
The intensity and events of the past year were the impetus to accelerate the conversation of shortening the settlement cycle.
Value of a Shortened Settlement
Even in the face of unprecedented volatility and volume, panelists noted the viability of the current settlement system. However, the recent events have presented an opportunity to transform how the entire industry operates, including broker/dealers, buy-side, custodians, depositories, and various other participants.
The risk and cost to the financial ecosystem, as well as operational friction, increases with the number of days between trade execution and settlement. In addition to reduced settlement and margin, panelists were excited about the journey to devise a plan to accelerate settlement, noting it is not often stakeholders have an opportunity to rethink and re-imagine market conventions that support ecosystems. One panelist noted it was the industry’s opportunity to create a blueprint and roadmap that benefits all participants.
Accelerator of Change
The successful transition to a T+1 settlement provides an opportunity for the industry to modernize not only settlement infrastructure but improve many processes in the ecosystem. However, there are implications, including the U.S. being on a different cycle than other regions, hence, these changes need to be done thoughtfully.
The benefits of shortened settlement include a reduction in capital requirements, which translates to improved liquidity and pricing to the end investor. It will also provide a reduction in counterparty and operational risk and bring better best practices and discipline to markets.
A move to T+1 is the beginning of the effort to reach a faster settlement. One of the most significant benefits will be the conversation to further accelerate the settlement cycle to same day, or “night of T.” With so many stakeholders working on the move to T+1, there is analysis that is looking at the possibility of T+0, and the role of different market constituents in clearing and settlement transactions.
A delineation should be made between T+0 and real-time gross settlement. While both happen on the same day, T+0 settlement takes advantage of all netting that provides capital efficiency to the industry.
Panelists noted that in any shortened settlement — T+1 or T+0 — the money and securities need to move with the same level of efficiency that DTCC already provides. When considering a move to an environment of simultaneous trading, there is the possibility of more inefficiencies than benefits and knock-down effects to other processes.
Journey to Faster Settlement
The journey to T+1 gives the entire financial markets ecosystem a unique opportunity to look at the way processes work to not only move to T+1, but also T+0 and this move is achievable with the current technology and platforms, and many transactions today are executed this way. Pozmanter explained, “T+1 is an interim step for the industry as well as a stopping point to T0. Real-time gross settlement scenario is probably not practical given today’s volumes as the industry would lose tremendous benefits, including netting, the impact on financing, securities lending and buy-side activity.”
Pozmanter also suggested that as firms begin to look at processes, conventions and behaviors to move to T+1, the conversation should include a move to T0. And, as DTCC prepares for T+1, the firm is also working on a parallel track for a T0 settlement.
DTCC’s current structure and technology already allow accelerated settlement. The firm will begin to publish this data daily and review with clients to ensure a common understanding of what those transactions represent and how they can be facilitated into a T+0 process. “Currently, NSCC and DTC settle thousands of transactions on T+1 and T+0 on a daily basis. NSCC trades real-time settlement until 11:30AM and bilateral transactions settle instantaneously at DTC till the close of the day,” Pozmanter added.