DTCC outlines plans to remove entire day of settlement exposure

DTCC plans new algorithm to re-engineer night cycle and increase settlement rates going into the next morning.

By Jonathan Watkins

The Depository Trust & Clearing Corporation (DTCC) has said it plans to remove an entire market day of settlement exposure without eliminating a calendar day from the standard trade settlement process, beginning in Q3 2019.

The first phase of settlement optimisation will be focused on a night cycle re-engineering, a processing batch occurring in the overnight hours whereby DTCC will seek to increase settlement rates going into the next morning.

According to the post-trade infrastructure provider, the current algorithm results in a night cycle settlement rate of about 45% for all transactions during that period. In its new plans however, DTCC estimates it can increase that same settlement rate to as high as 90%.

The more advanced settlement processing algorithm evaluates each member’s transaction obligations, available positions, transaction priority instructions and risk management controls while identifying the transaction processing order that maximizes the number of transactions settled.

“Night Cycle Re-engineering will create and lead to a number of industry benefits including improved processing efficiency, reduced operational risk and improved intraday settlement finality,” said Murray Pozmanter, DTCC managing director and head of clearing agency services.

“With this plan, we are beginning to bring our vision for the evolution of the US equities market structure to life.”

This increase in settlement in the night cycle is a prerequisite for the Settlement Optimisation Working Group – formed in September 2017 – to explore the implementation of the second phase of its settlement optimisation programme, which involved the introduction of morning settlement in addition to the end-of-day settlement process.

DTCC added that by moving from the afternoon of settlement date to the morning before market open, the risk associated with funds settlement will be reduced.