The Depository Trust & Clearing (DTCC), a US-based post-trade financial services firm, is planning to launch first phase of settlement optimization, in a bid to remove an entire market day of settlement exposure without extinguishing a calendar day from the standard trade settlement process.
DTCC is considering a phased approach to implement settlement optimization, based on support and feedback from the Settlement Optimization Working Group.
The first phase of settlement optimization will initially focus on night cycle re-engineering, a processing batch taking place in the overnight hours. It will help to increase settlement rates going into the next morning.
Current sequential algorithm is said to provide a night cycle settlement rate of about 45% for all transactions during that period, while it is expected to increase the same settlement rate to more than 90% due to re-engineering.
The increase in settlement in the night cycle is a requirement for the working group to explore the implementation of settlement optimization phase 2.
The risk associated with funds settlement will be decreased by moving from the afternoon of settlement date to the morning before market open.
DTCC managing director and clearing agency services head Murray Pozmanter said: “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.
“With this plan, we are beginning to bring our vision for the evolution of the U.S. equities market structure to life.”
The new approach to the night cycle inserts an advanced settlement processing algorithm, which can assess each member’s transaction obligations, available positions, transaction priority instructions and risk management controls.
It will also help to detect the transaction processing order, which maximizes the number of transactions settled.
According to DTCC, the introduction of night cycle re-engineering is subject to regulatory approval.