The U.S. financial industry’s clearance and settlement model has evolved over the past 45 years to be among the most cost-effective and efficient in the world. DTCC’s two major proposals in this paper — accelerated time to settlement and settlement optimization — could enable clients to further improve workflows, optimize capital and reduce risk, reducing settlement processing inefficiencies through automation. These initiatives build on existing DTCC capabilities while enhancing liquidity, reducing risk, and improving straight-through-processing (STP).
- Accelerated Settlement: The traditional approach to shrinking the time gap between trade and settlement has been to maintain the current process but reduce calendar days. DTCC is considering a proposal to move settlement finality of eligible equity trades from the afternoon of settlement date to the morning before market open, which means an entire market day of settlement exposure could be eliminated without removing a calendar day.
- Settlement Optimization: The current methods for settlement, and especially rigid processing rules in the night cycle, can actually inhibit the efficient movement of transactions through the system. Improving processing efficiency through night cycle reengineering, enhanced asset lending, an automated margin pledge facility, and the introduction of a new, intraday settlement slice could bring settlement from end-of-day to the beginning of the day.
- By optimizing settlement — and optionally, accelerating settlement beyond T+2 — clients will be able to significantly reduce capital requirements, systemic risk and operational costs while still preserving the resiliency of the current infrastructure.