Thousands of words have been written and spoken recently about the importance of accelerating settlement in the US equities markets—and as this initiative is one of DTCC’s priorities, I’ve shared my views on more than a few occasions. So, I really appreciated the succinct way an excellent Buttonwood column summarized the issue in the Economist.
“Risk is a function of time,” says the column Why it matters when trades settle. The column goes on to explain “the longer between trade execution and completion, the bigger the ’counterpart’” risk…and the heftier the margin payments that brokers and investors have to post with clearing-houses.”
Related: The Importance of Accelerating Settlement
Margin and other elements of risk management are the critical underpinning of the safety and stability of the global financial markets. The Economist is absolutely correct in its assessment that reducing settlement times from the current T+2 to T+1 will reduce systemic risk and significantly lower costs.
As you know, DTCC is again partnering with SIFMA and ICI to shorten the settlement cycle, and we are finalizing a blueprint to move the industry to T+1, which we plan to release in the coming weeks. At the same time, DTCC is continuing to innovate with Project Ion, our alternative settlement platform that leverages distributed ledger technology to support shorter settlement cycles—not just T+1 but T+0 settlement—while retaining the advantages of central netting and the trade guarantee of a CCP. Last month, we announced that we will launch the initial phase of the Ion platform in the first quarter of 2022.
While we are strong advocates for accelerating settlement, we must continue to balance speed with market safety. I agree with Buttonwood’s final point, where the difference between reducing settlement times and embracing real-time settlement is highlighted, explaining that the latter requires pre-funding and synchronization with “no room for error…The message is clear: pushing things too far could replace one set of risks with another, scarier one, in which a small number of failed trades set off a chain-reaction across back offices worldwide.”