After the multi-year project to bring T+2 settlement to the US equities as well as corporate and municipal bond markets, is the industry ready to shorten the settlement cycle further?
The Depository Trust & Clearing Corp. wants to discuss other ways in which Wall Street could further improve post-trade processes and has issued a white paper aptly titled Modernizing the US Equity Markets Post-Trade Infrastructure.
“Even as we were leading up to the implementation of T+2 in September, we already had received feedback and had some conversations with various market participants who were interested in maybe going a bit further following the implementation,” said Dan Thieke, managing director and general manager, settlement and asset services at the DTCC. “As that implementation went in successfully, those conversations continued.”
In the paper, the DTCC proposes four projects that could remove additional operational risk out of the settlement process by implementing an expedited settlement model, developing an alternative settlement model, creating an end-to-end "match-to-instruct" workflows, and deploying DTCC's new Exception Manager platform.
The authors noted that the National Securities Clearing Corp. already has T+1 settlement capabilities. One approach might be to have the parties to the transaction select an accelerated settlement process prior or at the point of the trade.
“This would only impact those firms or entities that would be interested in going down this path while leaving the infrastructure in place to settle transactions in the regular T+2 way,” said Thieke.
However, adding a second settlement cycle, which would start at the beginning of the Depository Trust Company's night cycle and net transactions in the morning, to its end-of-day settlement procedure would not be optional.
“This proposal effectively would be a mandatory change because we would not be able to allow clients to opt out of that process,” explained Thieke. “This would require all of our clients and members to agree on establishing an earlier settlement process.”
If the DTCC were to establish an automated match-to-instruct workflow, it would permit dealers and investment managers to send their settlement instructions directly from a transaction's match or affirmation without needing to send them separately, according to the authors.
The final proposal is more fact than theory as earlier this month the DTCC launched its DTCC Exception Manager platform that enables users to publish, manage, and communicate through the trade lifecycle, according to DTCC officials at the time.
The DTCC and the industry could implement each project separately, but they do complement each other, noted Thieke.
“If we were able to implement all four of those, you could accelerate settlement transactions from T+2 to what essentially is T+1/2 for anything queued up for the morning that follows the trade,” he said. “It would significantly reduce the time between trade and settlement day. ‘Match to Instruct’ would allow a greater number of transactions to come into our night cycle in a made status, which would effectively increase the number of transactions that could be optimized and settled earlier in the day. Exception Manager would work complementary with optimization providing quicker resolution for transactions that have not achieved a ‘made’ status.”
The DTCC has had some high-level discussions regarding the cost-benefit analysis of the projects, according to Thieke.
“Those are things that we would have to dig deeper into as we continue our conversation with the industry,” he added.