Murray Pozmanter, Managing Director and Head of Clearing Agency Services and Global Operations at The Depository Trust & Clearing Corporation (DTCC) sat down with Focus recently to discuss DTCC’s newest white paper 'Modernising the U.S. Equity Markets Post-Trade Infrastructure'.
Murray, please could you explain what has prompted DTCC to examine and enhance the U.S. settlement process for equities?
Now that the U.S. settlement cycle has been shortened to trade date plus two days, or T+2, an achievement the industry reached in September of 2017, we are excited to expand and develop DTCC’s vision on what’s next to reduce time and risk in equities clearing and settlement.
The traditional approach to shrinking the time gap between trade date and settlement date has been to maintain the current process but reduce calendar days. This is how the industry moved from T+5 to T+3 more than 20 years ago, and from T+3 to T+2 last year. In our new paper 'Modernising the U.S. Equity Markets Post-Trade Infrastructure' DTCC puts forth two proposals – settlement optimisation and accelerated settlement – which could potentially get our clients to a settlement cycle of even less than T+1 without removing a calendar day, and while still maintaining the substantial benefits of centralised netting and risk management.
How will these two proposals, settlement optimisation and accelerated settlement, reduce the settlement cycle further?
The time between when a trade is executed and when it is settled exposes both parties – buyers and sellers – to credit, counterparty and operational risk, and ties up a significant amount of capital to fulfill margin requirements. The move from T+3 to T+2 reduced this issue, but we believe more work can be done to reduce it even further.
The goal of settlement optimisation, which is an enhancement to our settlement process, is to improve processing efficiency, promote settlement finality, reduce equity clearing margin requirements, and provide clients with liquidity enhancements. To enhance our settlement process, we are proposing the creation of an alternate settlement model through the reengineering of four primary core settlement components: night cycle reengineering, enhanced asset lending, an intraday settlement capability and a NSCC Equity Pledge Facility.
Accelerated settlement is an option for clients to request their trades to settle faster. DTCC is considering a proposal to move settlement of eligible trades from the afternoon of settlement date to the morning of settlement date, which means an entire market day of settlement exposure would be eliminated without removing a calendar day. DTCC currently has T+1 settlement capabilities, so combining that with increased morning settlement transactions would achieve most of the benefits of settlement without sacrificing the market efficiencies that have developed over time.
Essentially, with optimisation and accelerated settlement together, DTCC clients would be able to significantly reduce capital requirements, systemic risk and operational costs while still preserving the resiliency of the current infrastructure. Our clients would have the option to settle transactions on less than T+1, what we’re calling 'T-plus-a-half'.
What are the next steps?
We are gathering additional input from the industry and are in the process of developing a business case to understand the costs and savings associated with each of these initiatives. DTCC has already formed several industry working groups to promote this dialogue.
To minimise the impact on our clients, we will leverage existing input and output wherever possible during implementation of the proposals. Night cycle reengineering, a prerequisite for the intraday settlement slice, will require some changes from participants. However, we believe these changes will be minimal – and certainly nowhere near the scope of the industry’s coordinated move to T+2.
Each of these proposed initiatives are subject to further development through discussions with key stakeholders, including participants and regulators, and any required regulatory approval.