DTCC proposed a method for shortening the U.S. trade settlement cycle from two business days ("T+2") to one business day ("T+1").
In a white paper, DTCC stated that industry participants would benefit from substantial risk reduction as a result of the move to T+1, particularly during times of market stress and volatility. In order to achieve T+1 within two years, DTCC proposed that:
- by Q1 2021, distributed ledger technology ("DLT") prototype development on a digital platform should be completed;
- by Q2 2022, DTCC would begin shifting to an "enhanced settlement model," which better integrates processes from its equities clearing and settlement subsidiaries; and
- by 2023, the U.S. settlement cycle, with alignment between market participants and regulators, should be officially moved to T+1.
DTCC stated that obstacles to netted zero business days ("T+0") and real-time gross settlement include:
- eliminating the liquidity and risk-mitigating advantages of current netting features;
- a substantial increase in failed transactions;
- a lack of predictive financing ability;
- the necessity for creating a real-time reconciliation process and real-time stock records for regulatory compliance purposes; and
- a loss of a central clearing counterparty trade guaranty.
In a statement, SIFMA CEO Kenneth E. Bentsen, Jr. said that market participants and regulators must have sufficient time to accomplish the shift to T+1, especially considering the changes in operational responsibilities resulting from other regulations, including the Consolidated Audit Trail.
Commentary Conor Almquist
A major reaction to the GameStop situation has been a call for shorter settlement times. (See, e.g., SEC Commissioner Peirce's recent address, Citadel's Kenneth Griffin testimony on shortening of settlement cycles to T+1, and Robinhood's Vladimir Tenev call for real-time settlement.) It seems that DTCC has taken these calls for action quite seriously, and is responding with a proposal that could have substantial benefits for the market, despite leaving those who call for real-time settlement disappointed. As both Commissioner Peirce and DTCC note, real-time settlement would present substantial logistical challenges, in addition to potentially harming liquidity and increasing risk. It will be interesting to see if the general reaction to T+1 settlement is positive, or if there will be continuing social pressure towards T+0, especially as technology continues to develop and DTCC concedes that T+0 settlement can be supported using NSCC (National Securities Clearing Corporation) and DTCC's existing technology.
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