DTCC proposes shortening US settlement cycle in wake of GameStop trading frenzy
The Depository Trust & Clearing Corporation (DTCC) today presented a roadmap for shortening the settlement cycle for U.S. equities to one business day after the trade is executed (T+1). DTCC’s stance is similar to that of Robinhood and is outlined as the stock market feels the consequences of the recent GameStop trading frenzy.
In its latest paper, “Advancing Together: Leading the Industry to Accelerated Settlement,” DTCC highlights the immediate benefits of moving to a T+1 settlement cycle, including cost savings, reduced market risk and lower margin requirements as well as the firm’s plans for galvanizing the necessary support for the project across a wide range of market participants.
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. DTCC notes that it does not have the regulatory or legal authority to unilaterally change the settlement cycle. Despite this, DTCC continues to take a leadership position to shorten the settlement cycle to T+1, similar to the role it played in 2017 to move to T+2.
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. Based on simulations detailed in the paper, DTCC estimates that a move to T+1 could bring a 41% reduction in the volatility component of NSCC’s margin.
Key dates proposed include:
- Q1 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.
- H2 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% reduction in the volatility component of NSCC margin.
- By 2023: DTCC proposes the U.S. settlement cycle to officially move to T+1, with market participant and regulator alignment.
In the paper, DTCC also outlines the feedback it has received from clients regarding barriers to netted T+0 and real-time gross settlement. For instance, real-time gross settlement could require that transactions in the U.S. market be funded on a transaction-by-transaction basis, eliminating the liquidity and risk-mitigating benefits of today’s netting features. Instantaneous settlement would require trades to be prefunded on an unsecured basis, which could limit market liquidity.
Also, without netting, the number of transactions to be settled would soar and the number of failed transactions could rise significantly.
Finally, T+0 does not allow for predictive financing, so clients would likely not know their financing needs for a given day until trading has stopped. Securing end-of-day funds, or determining intraday investment amounts, could be difficult and costly.
The paper states that many of these issues apply solely to T+0 settlement, and a move to T+1 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. With a move to T+1, the industry can retain the core benefits of DTCC’s centralized netting and risk management, while moving to a shorter settlement time.