US equities to experiment with DLT integration in settlements

By Emma Olsson | 29 June 2020

The US equities market may see a combined digital ledger technology (DLT) and legacy settlement solution, as accelerated settlements gain importance.  

“Moving towards that T+0 model is really around doing so as an industry and doing so with a way that doesn’t force transformational change on everybody on day one,” said Artem Korenyuk, executive director, business innovation at DTCC on a DTCC Forum panel today.

According to Michael McClain, managing director and general manager of equity clearing services at DTCC, the trade processor has integrated Project Ion, an experimental DLT solution, into the current central depositories, allowing firms to immobilise securities in the current systems and tokenise them on the DLT system.

“That way you have a close integration between the old and the new. This optionality is something that is going to enable accelerated settlements sooner than we were able to do T+2 and it allows really fast adopters to take advantage of it sooner,” said McClain during the panel.

Regulators are being consulted.

While firms may be able to support same day settlements in some cases, the ability is far from universal and dependent on a number of factors. Often for same day settlements, trades need to be in by a certain time as existing systems do not know how to treat late book trades, said Emmanuel Aidoo, global head of digital asset markets, Credit Suisse, who sat on the same panel.

“Even though those systems exist, they need to become the norm versus the exception,” said Aidoo.

Since September 2017 US equities have operated on a T+2 settlement cycle. Several infrastructures support T+1 and in some cases T+0 settlement cycles, but a combination of factors – market behaviour, legacy tech, client firms operations – make it difficult to roll out on an industry wide level, according to a DTCC case study from this year.

The market volatility seen in March and April highlights the importance of shortened cycles and the lower margin requirements they offer.

“In addition to the business value which has largely been capital efficiency so we can reduce market risk which reduces margins, we want to get some operational pickup too. By leveraging DLT you’re able to do that,” said McCain.

“You’re able to get a lot more efficiency with seamless reconciliation, the state of your assets and communication with your client firm.”

According to Aidoo, since the beginning IT has been built to address specific pain points within an institution, which has led to disparate growth between settlement systems, risk management systems and more.

“Now 20 years on, we’re looking at this DLT and it’s confusing us – but it’s not confusing at all, it shouldn’t be. It provides us with the opportunity to unify those different processes that built up over time,” he said.

“If you have thousands of systems within a particular bank all moving data around… what DLT allows us to do is to share data, to have a true single source of truth not just within our institutions but across our firewalls. To have that single source of truth but also ensure that as we move state from pending to closed, that it’s consistently applied across the firewall, too.”

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