The Depository Trust & Clearing Corporation (DTCC) is planning to strengthen intraday settlement finality in the US financial markets by proposing the implementation of major structural changes in the settlement of equities, corporate debt and municipal debt securities over the next five years.
In a white paper to the industry titled “A Roadmap for Promoting Intraday Settlement Finality in the US Markets,” DTCC, through its depository, The Depository Trust Company (DTC), says it will make major, multi-year enhancements that “represent DTC’s vision for the future of settlement finality and risk reduction” in the financial services industry.
While “DTC continuously monitors and reviews its settlement processes and makes adjustments as needed…DTC’s recent efforts to further reduce systemic risk…have identified a number of significant enhancements to the US settlement process that will further improve the safety and soundness of the system for years to come, while at the same time aligning its settlement system more closely with global standards,” the paper states. Many of these enhancements are the subject of ongoing discussions with participants and regulators.
The paper offers a “settlement roadmap that will provide a high-level overview of the planned upcoming system enhancements and a proposed implementation timeline for each enhancement.” The proposed enhancements will be made in four key areas:
• Settlement matching provides DTC customers the ability to authorise or match transactions prior to DTC attempting to process these transactions. This will eliminate the need for reclamation transactions or “reclaims”, enhance intraday settlement finality, promote settlement certainty and help eliminate credit and liquidity risk.
• CNS for value will improve the way transactions from National Securities Clearing Corporation’s (NSCC) Continuous Net Settlement (CNS) service are settled in DTC, providing clients with improved intraday liquidity management. CNS for value also positions DTC to introduce intraday settlement slices – moving away from today’s end of day model.
• Improving intraday finality for money market instruments (MMI) transactions will create a new model for processing MMIs by aligning issuance and maturity activity within specific issuers, helping to eliminate risks associated with MMI reversals and further reduce intraday uncertainty.
• A shortened settlement cycle study analyses the business case for shortening the settlement cycle for US equity and corporate and municipal debt transactions from its current three days (T+3) to two days (T+2) or one day (T+1). Shortening the settlement cycle would reduce risk as well as reducing a customer’s liquidity and capital requirements. DTCC commissioned a study by the Boston Consulting Group and will discuss next steps with the industry in early 2013.
“The suggested changes discussed in the settlement white paper represent the most significant structural enhancements to the settlement process in decades,” says Susan Cosgrove, DTCC managing director and general manager, settlement and asset services. “In addition to promoting intraday settlement finality and reducing systemic credit and liquidity risk, these initiatives will align DTC with internationally-established best practices, promote straight-through processing and better position DTC for a shorter settlement cycle, if and when recommended.