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DTCC outlines two-year roadmap for transition to shorter settlement
A new white paper highlights the benefits of moving to a T + 1 settlement cycle and details plans to achieve this in two years .
DTCC has released a two-year industry roadmap for shortening the settlement cycle for US equities to one business day after the trade is executed . While the DTCC has been investigating the move to a shorter settlement cycle through its Project Ion for some while , market pressure following the GameStop and Robinhood incident earlier this year has ramped up market pressure on reducing settlement times and the perceived risk of T + 2 . Within the plan is a three-staged approach beginning this quarter with the completion of a 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 ). Following this , DTCC said it will begin transitioning in the second half of 2022 to an enhanced settlement model that more closely integrates processes from DTCC ’ s equities clearing and settlement subsidiaries , NSCC and DTC .
Finally , by 2023 , DTCC proposes the US settlement cycle to officially move to T + 1 , with market participant and regulator alignment . “ The time to settlement equals counterparty risk , which can become elevated during market shocks . It can also lead to the need for higher margin requirements , which are critical to protecting the financial system and investors against a firm default ,” said Murray Pozmanter , head of clearing agency services and global business operations at DTCC . “ 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 .” DTCC highlights the immediate benefits of moving to a T + 1 settlement cycle as cost savings , reduced market risk and lower margin requirements – of which the latter of would appease critics of the settlement system after margin requests forced retail trading platform Robinhood to halt purchases of GameStop and some other stocks . The saga led to widespread calls – led by Robinhood ’ s CEO – to consider a T + 0 settlement ; however this has been quickly rejected by the DTCC and other industry experts due to the removal of liquidity and risk-mitigating benefits of the netting system currently in place . Meanwhile , DTCC pointed out that the number of transactions to be settled would soar and the number of failed transactions could rise significantly . However , participants are keen on a T + 1 shift , which has possibly been accelerated following the incidents at the start of the year and the DTCC believes this could lead to a 41 % reduction in the volatility component of NSCC ’ s margin . “ As the industry continues to align itself around shortening the settlement cycle , DTCC has proactively begun laying the foundation and is ready to move quickly for the eventual move to T + 1 ,” said Michael McClain , managing director and general manager of equity clearing and DTC settlement services at DTCC . “ We remain committed to working with the industry , regulators and key stakeholders to shape the future of clearance systems and all the exciting possibilities they could bring
– from reduced risk and costs , to improved business resilience and increased operational efficiencies .”
10 Global Custodian Spring 2021