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Enhancing the U.S. Equities Settlement System

By Michele Hillery, DTCC General Manager of Equity Clearing and DTC Settlement Service | 3 minute read | October 25, 2021

Clearance and settlement was thrust into the spotlight during the meme stock crisis, with calls to reduce the current standard T+2 settlement cycle with real-time gross settlement. As explained in a recent white paper, DTCC believes, and the industry agrees, that T+1 is the optimal settlement cycle for today. By reducing the time between trade execution and settlement to T+1, the industry would reduce systemic risk, operational risk, liquidity needs, buy-side counterparty exposure, and broker-to-broker counterparty risk. It would significantly lower the risk and uncertainty arising from unsettled trades during market volatility, such as what we saw earlier this year, while enhancing capital efficiency.

Related: Achieving Optimal U.S. Securities Settlement Window

A move to T+1 would also allow market participants to continue to leverage the National Securities Clearing Corporation’s (NSCC) netting feature which delivers great cost efficiencies to the industry. 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, NSCC netted down $1.77 trillion dollars in total daily trade activity to a final settlement value of just under $38 billion.

For broker/dealers, a move to T+1 would lead to a significant reduction in margin and collateral requirements. An average of over $13.4 billion is held in margin each day to manage counterparty default risk across the system. Shortening the settlement cycle would help strike an improved balance between risk-based margining and procyclical impacts.

Some industry participants have suggested that real-time gross settlement (RTGS) could be a better solution to address margin requirements. While RTGS could have some benefits, they are outweighed by the challenges it presents. Because all transactions would need to be funded on a transaction-by-transaction basis, the benefits of netting and financing could be eliminated. Also, it is important to note that RTGS is not the same as netted T+0 settlement. With netted T+0 settlement, trades could still be netted and settled at the end of the same trading day. NSCC offers this functionality today, and DTC is already a T+0 platform and settles transactions on a near-instantaneous basis, all with existing classic technology.

Improving the settlement cycle can be addressed in two ways: through technology and by shortening the actual standard settlement cycle timeline.

That said, the employment of new technologies has been a key priority for DTCC when considering enhancements to the existing settlement infrastructure. In early 2021, Project Ion, which uses distributed ledger technology (DLT), was introduced to bring new efficiencies to settlement. Now, with six months of successful testing of the prototype completed, we are building out the platform to a production-ready workflow with a detailed roadmap for full industry integration and adoption.

Project Ion will adhere to DTCC’s rigorous regulatory requirements across resiliency, stability, security, risk, and controls and will be designed to provide an additional settlement option for the industry that will deliver upon our core benefits of risk management and volume capacity. This includes netting, the trade guaranty of the CCP, and seamless interoperability between the Project Ion platform and DTC’s classic settlement platform. The platform is a parallel effort to the current industry move to T+1, and will be capable of supporting T+1, T+0 and other settlement timelines.

Improving the settlement cycle, and further reducing the risks within the cycle, can be addressed in two ways: through technology, in some cases new technologies, and by shortening the actual standard settlement cycle timeline, safely and appropriately. Right now, we firmly believe that T+1 is the most appropriate settlement cycle. We will continue to collaborate with market participants and relevant associations to work towards achieving T+1 while increasing efficiency and lowering risk across the industry.

This article was initially published in Sibos on October 7, 2021.

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

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