DTCC Announces First Phase of Settlement Exposure Reduction

The DTCC announced its timeline for settlement optimization—which aims to shorten settlement exposure to 1.5 days to half a day from trade—with the first piece set to be implemented in the third quarter of next year. The company decided to take a phased approach based on feedback from the Settlement Optimization Working Group.

Settlement optimization will begin with night cycle reengineering, which will process settlement batches overnight to increase settlement rates the next morning. Currently, settlement rates are around 45 percent for transactions through a sequential algorithm, but the DTCC estimates this will increase to 90 percent. It will introduce an algorithm that will evaluate transaction obligations, available positions, transaction priority instructions and risk management, and determine the best processing order.

Night cycle reengineering must be approved by regulators before launch.

A white paper released by DTCC in January identified two proposals hoped to further bring down settlement exposure—”accelerated settlement,” which lets clients request trades to settle faster, and settlement optimization.

DTCC managing director and head of clearing agency services Murray Pozmanter said in a statement that night cycle reengineering is part of the firm’s vision to bring more efficiencies.

“Night cycle reengineering will create and lead to a number of industry benefits including improved processing efficiency, reduced operational risk and improved intraday settlement finality,” Pozmanter said. “With this plan, we are beginning to bring our vision for the evolution of the US equities market structure to life.”

More trades settled during the night cycle is a prerequisite before the second phase of settlement optimization. The next phase will be the introduction of morning settlement in addition to the end-of-day settlement done today. The idea is to move settlement of trades from the afternoon to before the market opens so the risk is reduced.

DTCC president and CEO Michael Bodson said the move to settlement optimization is a reaction to how complicated the process has become.

“We’ll have to do more work of course but the industry has complicated the process too much so we need to attack inefficiency in every way,” Bodson said during the annual Securities Industry and Financial Markets Association operations conference in Phoenix, Arizona.

Shortening settlement risk exposure has been a concern for years. The industry moved to a shortened settlement cycle—trade date plus two days, or T+2— in September last year after 20 years of longer cycles. The DTCC notes that settlement optimization will shorten exposure without further reducing the settlement cycle, which would require industry agreement.