Key Takeaways
- Settlement fails are expensive and risky, driving major penalty / operational costs and increasing counterparty risk, liquidity risk, and market-risk exposure.
- Partial settlement is limited today because it requires significant manual coordination.
- Automated Partial Settlement, targeted for 2027, will let DTC settle what’s available automatically, reducing fails and manual work while improving settlement efficiency.
One of the more highly-anticipated workstreams identified as part of DTCC’s Equities Transformation project is Automated Partial Settlement, targeted for Q3 2027.
DTCC Connection spoke with Marcus Denne, Executive Director, DTCC Settlement, to understand the partial settlement process at DTCC, and how planned future enhancements in automation can help reduce settlement fails, reduce costs, and improve throughput efficiency for clients.
DC: To level set, can you explain how partial settlement works today?
MD: In today’s world, DTC checks whether a participant has sufficient securities available to make delivery, along with confirming there is enough collateral and liquidity as well. If there are insufficient securities to complete the order in its entirety, the delivery will be held in what we call a pending state, waiting for more securities to be received. If the full quantity of shares do not become available by the cutoff at the end of the day, the entire transaction fails.
A partial settlement is when a seller successfully delivers just a portion of the securities they owe to the buyer, rather than waiting until all securities are available. Part of the quantity and amount specified in the transaction settles, with the outstanding amount remaining to be settled at a later stage when more securities become available.
While partial deliveries of bilateral orders do occur today, it is quite limited because it requires clients to go through many steps of a manually intensive process to initiate and resolve.
For example, clients must identify opportunities, secure counterparty agreements to accept the partial delivery, and then manually enter the instructions through a series of carefully coordinated steps to ensure proper inventory management.
DC: What are the risks and costs of settlement fails? How big is this problem for the industry?
MD: Settlement failures can occur for a multiplicity of reasons, for example through a failure to affirm the transaction on a timely basis. However, the vast majority of transactions fail because of a shortage of inventory on settlement date.
There is a very real economic cost to settlement failures. They create a cost of financing failed transactions, usually accompanied by interest claims and ultimately the cost of buy-ins. The operational costs of managing fails can be significant, in repairing trades, additional reconciliation effort, and claims processing.
Fails also expose both the buyer and the seller to unnecessary risks, such as counterparty credit risk, liquidity risk, and during periods of volatility, the risk of market and price fluctuations.
DC: How will this partial settlement process work in the future, when the enhancement work is complete?
MD: DTC’s automated partial settlement solution will take the operational burden away from arranging partial settlement. It will automatically identify partial settlement opportunities, and process partial settlement for a delivery order that has been authorized by the deliverer and receiver. This will be a near real-time process that will run throughout the day.
We are also offering a new partial deliverer authorization feature. This will allow custodian banks with omnibus accounts at DTC to manage their clients’ inventory efficiently.
As part of the new service, we will also ensure partial settlement in fixed income securities will respect minimum and multiple denominations.
Auto-partial processing and partial delivery authorization will be included in the initial implementation of Partial Settlement. This change is scheduled to be available for client testing later in Q3 2026 and in production in Q3 2027.
Bilateral Securities Finance Transactions (SFTs) that settle through DTC will be included in Phase 2, with a targeted Q4 2028 deliverable.
These changes are designed to reduce both the value and the volume of the pending failing transactions, thereby creating significant capital and operational efficiencies for clients.
DC: How will this change benefit clients and the industry?
MD: Automated partial settlement will deliver increased settlement rates. Not only through maximizing our clients’ inventory to make deliveries but also increasing the number of onward transactions in the settlement chain that might otherwise have failed. Being a near real-time process, partial settlement will generate more intraday liquidity for our clients, reducing unanticipated funding requirements.
Automating the process reduces the manual work between the buyer, seller and custodian required for partial deliveries, reducing operational costs. Further, it is estimated that implementing partial settlement could reduce the overall value of these outstanding obligations and lead to a significant reduction in failed trade costs.
There will be reduced risk for clients, since a higher rate of successful settlements lowers counterparty and market risk, and resolving failed trades more quickly can reduce capital charges on aged failures. It is estimated that implementing partial settlement will result in a potential reduction of billions of dollars annually in failed activity while alleviating costs to firms and increasing liquidity.