Project Ion, one of the latest case studies from DTCC, is intended to evaluate the impact and benefits of distributed ledger technology (DLT) on accelerated settlement for the U.S. equities market.
Project Ion was formed through partnership between DTCC’s Clearing & Settlement Product Management Team and Business Innovation Group. DTCC Connection sat down with Mike McClain, Managing Director and General Manager of Equity Clearing and DTC Settlement Services at DTCC, and Jennifer Peve, Managing Director, Business Innovation at DTCC, to discuss digital accelerated settlement and some of the ideas proposed in the Ion case study.
Q. Where did this idea for digital accelerated settlement originate?
MM: DTCC has been working with the industry on ways to advance settlement optimization for some time. Even after we helped the industry successfully move to T+2 in September 2017, 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 4 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. We believe 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, 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 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: Can clients use the Digital Accelerated Settlement System right now?
JP: Project Ion is a Proof of Concept -- a hands-on, practical experimentation, if you will, to serve as a critical tool in engaging the industry in meaningful discussions. It explores new and alternative settlement models, leveraging the digitization of cash and re-representation of securities, to assess a potential new accelerated settlement service option.
No real-life or actual transactions are conducted, but the POC brings the concepts to life and gives clients the opportunity to roll up their sleeves and try it out, to help us imagine how a Digital Accelerated Settlement Service might work.
Q: Will the Digital Accelerated Settlement Service be built on distributed ledger technology (DLT)?
JP: DTCC has been leading the industry in its evaluation of DLT as a potential persistence layer for the future capital markets ecosystem, and we believe DLT presents an opportunity to shape the future vision of capital markets. 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 the 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. DTCC is committed to the safety and soundness of markets and waiting for technology to mature will not be an impediment to driving business value.
Q: What are the next steps?
MM: DTCC is now engaging the broader industry to gather feedback that will further inform both the design and assess the market demand for several new settlement enhancements to DTC’s settlement capabilities, including this optional accelerated settlement service.
JP: 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 and feedback from the industry.