Is T+1 settlement possible in two years?
Officials at the Depository Trust and Clearing Corp. (DTCC) think so and have released a two-year industry roadmap for a one-day settlement cycle after execution for U.S. equities, also known as T+1.
Building upon the successful T+2 effort in 2017, the DTCC is making its case via a new white paper, “Advancing Together: Leading the Industry to Accelerated Settlement.” The new manifesto is a key aspect of the DTCC’s push to get the industry focused on T+1 settlement amid a global pandemic, economic recession, and the emergence of disruptive technologies.
Despite our current set of challenges, the T+1 move “would not require large operational or technical changes by market participants, nor would it cause fragmentation and risk to the core clearance and settlement ecosystem,” the DTCC is arguing.
Besides, the industry wants to make the move now, say DTCC officials.
“Based on extensive industry engagement conducted throughout 2020, early indications suggest that market participants increasingly favor the move to T+1 to take advantage of capital and operational efficiencies, and benefit from significant risk reduction and a lowering of margin requirements, especially during times of high volatility and stressed markets,” according to the DTCC.
In addition, simulations show “that a move to T+1 could bring a 41 percent reduction in the volatility component of [the National Securities Clearing Corp.’s] margin,” DTCC officials say.
Given all that, though, getting to T+1 will be akin to heroically herding cats. But the T+2 success is a model that could be replicated.
“In order to move to T+1, industry participants must align and agree to shorten the settlement cycle by implementing the necessary operational and business changes, and regulators must be engaged,” says the DTCC, which lacks regulatory or legal authority to shorten the settlement cycle.
“We have been working collaboratively with a wide cross-section of the industry to build support for further shortening the current settlement cycle over the past year, and we have outlined a plan to increase these efforts to forge consensus on setting a firm date and approach to achieve T+1,” says Murray Pozmanter, head of clearing agency services and global business operations at DTCC, in a prepared statement.
DTCC officials are providing major milestones on the way to achieving T+1. Some of the key dates proposed are:
- First Quarter 2021: “DTCC anticipates completion of prototype development for the Project Ion settlement system, which provides a T+1 environment for the industry on a digital platform using distributed ledger technology (DLT) and other emerging technologies. Industry testing will begin shortly after the prototype is completed.”
- Second Half of 2022: “DTCC to begin transitioning to an enhanced settlement model that more closely integrates processes from DTCC’s equities clearing and settlement subsidiaries, NSCC and DTC. Studies have shown an integrated settlement model could provide an 11 percent reduction in the volatility component of NSCC margin.”
- And by 2023: “DTCC proposes the U.S. settlement cycle to officially move to T+1, with market participant and regulator alignment.”
The milestones “will complement DTCC’s prior efforts to further optimize current processes and increase settlement efficiency, such as the re-engineering of night cycle processing, which was completed last year,” officials say.
The DTCC is inviting industry participants to take part of the conversation via firstname.lastname@example.org