As the industry moves forward on its accelerated settlement journey, there will be significant ripple effects and impacts across the entire investment ecosystem. John Abel, DTCC Executive Director of Clearance and Settlement Product Management, joined with representatives from the custodian, broker and investment management communities at the ISITC Fall Forum to speak about the challenges and benefits ahead.
Abel was joined by Christopher Butler, Director of Global Custody Product, BNY Mellon; Christopher Daur, Head of the Client Coverage Group for the Americas, Goldman Sachs & Co, LLC; and Louis Rosato, Director, Investment Operations, Global Business Strategy & Relationship Management, BlackRock, Inc. Ahmed Elghazaly, Director Investment Operations, ICI, moderated the discussion.
Related: Building the Settlement System of the Future
Monumental Step Forward for the Industry
The renewed interest in shortening the settlement cycle came with DTCC’s white paper, Advancing Together: Leading the Industry to Advanced Settlement, which was published earlier this year in February 2021. The timing of the paper also coincided with the increased awareness across the industry of the importance of the settlement cycle, due to the heightened volatility seen in 2020 and early 2021.
Simulations have shown a 41% reduction in the volatility portion of the NSCC margin requirements, translating into billions of dollars back to members and generating capital efficiency across the DTCC/NSCC membership base.
All market participants — custodians, broker/dealers, investment managers — will benefit from a shortened settlement cycle. However, there are many moving parts to a trade, and an industry-wide move to shortened settlement needs to occur in a carefully coordinated fashion to reduce the introduction of additional risk to the markets. The operational risk of elongated settlement is connected to all market participants and ultimately negatively impacts investors.
Rosato noted how taking just one day out of the settlement cycle can act as an accelerator of change, allowing the creation of capital, reduction of balance sheet risk and providing an opportunity to drive better processing and innovative use of technology.
One of the main benefits of the shortened cycle will be the reduction of margin at NSCC. Abel explained that simulations have shown a 41% reduction in the volatility portion of the NSCC margin requirements, translating into billions of dollars back to members and generating capital efficiency across the DTCC/NSCC membership base.
Preparing the Industry for Accelerated Settlement
In preparation for the shortened settlement cycle, the industry has been engaged for the past 3 months in working groups, identifying challenges and creating a roadmap and a Playbook to T+1. As the tasks become clearer, each firm will need to analyze the impact of this change on their systems and processes to ensure seamless implementation without the introduction of additional risks in the system.
While the underlying technology to settle a trade at T+1, or even T0, is already available at DTCC, panelists agreed that behavior is one of the major stumbling blocks to a wide-scale move to a shorter settlement cycle. Real-time solutions are available, but not all firms take full advantage of interoperable tools and technologies to drive business processes in new ways. These solutions allow resolutions to business problems and enable firms to do more with less.
The industry continues to spend time working on the workflow processes impacted by the move to T+1, including affirmation allocation. According to Dauer, getting affirmation done quickly — having trades matched and affirmed — is imperative at the offset. A shortened settlement cycle will have a tremendous impact on DTC's processing schedule, and each individual component and function will need to be reviewed holistically.
Given the changes needed to the settlement workflow, members should look to the available tools and solutions that can help automate internal processes, remove friction, and drive business processes in new ways.
Other market efficiencies can also be improved and achieved from a shorter cycle. Butler reiterated how many trades already settle at T+1, or even T+0, while many instructions aren't received until settlement, presenting an opportunity for clients to improve their workflow. Getting real-time data from the market to the custodian to clients and utilizing APIs and industry utilities will allow a better connection between the broker, custodian, and investor.
The importance of data cannot be overlooked when viewing the end-to-end trade lifecycle — and the uniformity and compatibility of the data is critical. Panelists discussed how data can be used to analyze risk profiles, predicting if a settlement will fail before it happens. And, looking at a trade from end-to-end, it is vital to tie the story together in a more cohesive way, matching data attributes, ensuring all messages on a transaction and data attributes are attached and easily accessible, thereby creating a gold standard.
Related: Preparing for T+1 Settlement
As the U.S. markets move to T+1, one of the consequences could potentially be different settlement dates across regions. According to Butler, the key is to have affirmation and allocation happen on trade date to ensure that risks are not transferred in the condensed time frame, especially when looking at Asian time zones. Butler also detailed how, through the ecosystem lens, no transaction lives by itself, and the communication and partnership between custodians, brokers and industry working groups can help develop the right solutions.
Currently, only Canada has indicated that it will simultaneously shorten the settlement cycle with the U.S., creating a challenge in trading with less efficient markets. As some trades will be out of sync, firms will need to view trades on a holistic basis and look to counterparties and custodians for assistance. However, Abel noted that several times in the past few years, settlement dates did not match, such as when Europe advanced to T+2 several years before the U.S. While this situation is not ideal, there is precedent on how it can be handled.
Driving Change for the Industry
Our modernization journey looks at where the opportunities for improvement are to take advantage of the opportunity to future-proof not only DTCC but the US marketplace as well.
Abel touched on the proposed 2023 industry launch of T+1, and while there are currently no key showstoppers, the industry needs to work together to achieve this common goal. In addition to behavioral changes, issues that need to be addressed include the impact on third-party system providers and vendors as well as required regulatory changes. Industry-wide conversations to understand the benefits of a shortened cycle are critical to gaining better efficiency and achieving a shortened cycle.
DTCC is modernizing infrastructure and aims to configure systems to support shortened settlement beyond T+1, including exploring new technologies such as DLT and tokenization, to improve the settlement cycle. Abel added, "Our modernization journey looks at where the opportunities for improvement are to take advantage of the opportunity to future-proof not only DTCC but the US marketplace as well."