Project Ion, one of the latest case studies from The Depository Trust & Clearing Corporation (DTCC), is intended to evaluate the impact and benefits of distributed ledger technology (DLT) on accelerated settlement for the U.S. equities market. Mike McClain, DTCC’s Managing Director and General Manager of Equity Clearing and DTC Settlement Services, gave his views to Focus about digital accelerated settlement and shared some of the ideas proposed in the Ion case study.
Q. Where did this idea for digital accelerated settlement originate?
MM: DTCC has worked with the industry on ways to advance settlement optimization for some time.
In September 2017, the U.S. accelerated the settlement cycle to T+2 in what was a highly complex and time-consuming initiative -- which reinforced that the biggest challenge was not technology, but rather process and procedure.
Even after we helped the industry successfully move to T+2, we saw the opportunity to drive further positive change. We quickly followed with an accelerated settlement and settlement optimization working group, and released a white paper just four months later.
Exploring the concept of an accelerated digital settlement service is the next step in these efforts to assess the impact and benefits of accelerated and optimized settlement for the U.S. equities market. The proposed design of a Digital Accelerated Settlement Service was inspired by key concepts from these initiatives, but now modelled around a T+0 settlement cycle.
Q: How can a shortened settlement cycle reduce risk and costs?
MM: Consider the conditions that we’ve all seen in the past couple months and the unprecedented volatility resulting from the COVID-19 pandemic: in March 2020, margin increased by more than 300 percent over historical averages.
A shortened settlement cycle could have significantly lowered margin requirements for clearing agency members and reduced both pro-cyclical margin and liquidity demands by an order of magnitude.
The reduction of liquidity demands and lessening the amount of money that needs to be collected at any one time is a key benefit that will strengthen our financial markets, especially during critical market events that result in periods of significant market volatility
Q: If the industry managed a move to shortened settlement from T+5 to T+3, and then T+3 to T+2, why can’t the industry likewise make a move to T+1 or T+0?
MM: Today, our subsidiaries DTC and NSCC can process trades with shortened settlements based on client request. Although DTCC’s current infrastructure supports T+1 and limited T+0 settlement cycles, market behavior, legacy infrastructure and operational processes at client firms make it difficult to accelerate further without a lengthy coordinated industry effort.
Forcing a wholesale move by the industry, like with the move to T+2, would not be easy, that’s why we’re exploring this digital accelerated settlement service as an optional service. It could introduce optimized settlement processes and accelerate settlement to T+0, while retaining the core benefits of DTC’s centralized netting and risk management.
One important key thing to note is that this service would not force operational or technical change, nor would it cause fragmentation the clearance and settlement ecosystem.
Q: Will a digital accelerated settlement service be built on distributed ledger technology (DLT)?
MM: While accelerated settlement and settlement optimization are possible using existing technology, DLT creates new opportunities to reimagine post-trade processing for the future, especially when combined with the best of today’s capabilities in a seamless manner, giving clients choices for how to best manage their settlement exposures.
Since DTCC’s first whitepaper on blockchain in 2016, DTCC has been closely evaluating DLT. The comprehensive technical assessment that we are conducting right now will help us determine a scalable implementation of a digital accelerated settlement service – be that on DLT, or something else.
Our intention is to select a technical stack that is best positioned to meet the business requirements without any compromise to our security and resiliency standards.
Q: What are the next steps?
MM: The project is currently very much in the experimentation stage, and a decision to move further on this journey will be determined following further analysis from the industry. DTCC is gathering feedback that will further inform both the design and assess the market demand for several new enhancements to DTC’s settlement capabilities, including this optional accelerated settlement service.