The Depository Trust and Clearing Corporation is close to completing work on a prototytpe settlement system based on distributed ledger technology, which could act as the precursor to a US move to a T+1 settlement cycle.
In a whitepaper outling a proposed approach to a shorter settlement cycle within two years, the Depository underscored the importance of Project Ion, a proof-of-concept unveiled in May last year that reimagines the public markets settlement processes through the application of asset digitalisation and distributed ledger technology.
The DTTC says it anticipates completion of prototype development for the Project Ion settlement system in Q1 2021 and that industry testing will begin shortly after.
A seperate initiaitve, operating under the code name of Project Whitney, focuses on exploring the potential for asset tokenisation and digital infrastructure to support private market securities, from issuance through secondary markets.
Although the DTCC does not have the regulatory or legal authority to unilaterally change the settlement cycle, market participants are said to be broadly in favour of the move. A shift to a next-day settlement cycle would enable firms to take advantage of capital and operational efficiencies, and benefit from significant risk reduction and a lowering of margin requirements, especially during times of high volatility and stressed markets.
“The time to settlement equals counterparty risk, which can become elevated during market shocks. It can also lead to the need for higher margin requirements, which are critical to protecting the financial system and investors against a firm default,” says Murray Pozmanter, head of clearing agency services and global business operations at DTCC. “We have been working collaboratively with a wide cross section of the industry to build support for further shortening the current settlement cycle over the past year, and we have outlined a plan to increase these efforts to forge consensus on setting a firm date and approach to achieve T+1.”
The route to T+1 is not solely dependent on the successful development of project Ion. The more important groundwork comes from the DTCC's own modernisation efforts, which entail closer integration of its equities clearing and settlement subsidiaries, NSCC and DTC. This is not set to come to fruition until H2 2022.