DTCC Moves Closer to Shortening Settlement Cycle

One of the challenges the industry is solving for is how to shorten the standard settlement cycle to T+1 or T+0 for all equity trades, according to Murray Pozmanter, Head of Clearing Agency Services and Global Business Operations, DTCC.

“Equity clearance and settlement is part of a large ecosystem of global financial markets, interconnected processes, and linked systems,” he said in a new white paper, “Building the Settlement System of the Future”.

Murray Pozmanter

“Accelerating the U.S. cash market settlement cycle to shorter than T+2 will have both upstream and downstream impacts on other parts of the market structure, such as derivatives, securities lending, financing, foreign clients and foreign exchange, and collateral management,” he added.

Pozmanter argued that the “current T+2 settlement cycle is very much a convention of generations of layered and complex market practice”. 

“Shortening that cycle for all market participants will require new approaches, an evolution of business capabilities across the industry, and, most importantly, industry coordination,” he said.

The industry’s primary goal must be “to create efficiencies without introducing additional risk to markets”. 

DTCC believes that central clearing and netting continues to be the most efficient and beneficial way of settling trades, irrespective of the technology or the settlement cycle, and is critical to the safe and efficient functioning of the U.S. capital markets, regardless of settlement date. 

DTCC has been building industry support for the move to T+1 for several years, and market participants are active and engaged in these projects. 

DTCC just announced that its Project Ion initiative, an alternative settlement platform that leverages distributed ledger technology (DLT), will move into a development phase following a successful prototype pilot with leading market participant firms. 

DTCC’s Project Ion has demonstrated that settlement in a T+1 or T+0 environment are effective use cases for distributed ledger technology (DLT).

“Cryptocurrency, digitized assets, DLT and other innovations increasingly are integral parts of our discussions about the evolving financial services industry, as firms, stakeholders and policymakers assess the challenges of implementation and regulation,” Pozmanter said.

DTCC tested a Project Ion proof-of-concept as a DLT use case in mid-2020 and expanded the functionality into a fully-fledged prototype in early 2021.

With six months of successful testing now complete, DTCC has gathered enough quantitative data and qualitative feedback from clients to guide the next steps: to build out a production ready workflow and a roadmap for full industry integration and adoption.

The first phase of the Project Ion platform will support bilateral deliver order transactions that will be initiated by pilot participants through client nodes hosted by DTCC. 

Once launched, the transactions will be processed through the Project Ion platform and then passed to DTC’s existing systems for settlement processing. 

The Project Ion platform is anticipated to be launched in the first quarter of 2022, and will serve as a parallel book and infrastructure for limited bilateral transactions on DLT, with DTC’s existing systems continuing to remain the authoritative source of transactions.

Subsequent phases will extend the functionality of the infrastructure and recordkeeping. 

Later phases are expected to extend functionality over time to realize the reconciliation efficiencies offered by DLT. 

DTCC has been careful to plan for early and later adoption of the functionality and technology offered by Project Ion, to be responsive to clients’ own development agendas. 

“For clients, this means that while the general industry can move ahead to achieve T+1 accelerated settlement on DTCC’s current classic systems, those clients ready to integrate onto the ledger can consider taking their development efforts in a different direction where applicable and begin to ready their firms for the future operating model without waiting for full-market adoption.”