DTCC: Future of Settlement Revamp Depends on Industry Appetite

Despite the disruption caused by the coronavirus, the Depository Trust and Clearing Corporation (DTCC) hopes to engage with some of clients, market participants, and regulators to determine whether a new settlement service would be valuable to the financial industry, and whether to move forward with developing it.

The DTCC is currently engaging with its membership and the broader industry to determine the next steps to optimize the settlement process to support a T+1 or T+0 settlement cycle, an initiative it has named Project Ion. But as global financial firms face diminishing returns for the first half of the year, as a result of the current crisis, the DTCC knows that getting industry commitment to adopt a new settlement model will be a difficult sell.

“DTCC is aware that the current crisis has resulted in resource constraints and challenges in terms of getting in front of clients on any new initiative or even existing initiatives that the industry is trying to move forward. We are sensitive to that and we understand that there are certain clients that may not be able to engage with us through this practical experimentation,” says Jennifer Peve, managing director of business development and fintech strategy at DTCC.

Last week, the DTCC announced plans to explore the benefits of digitalization in the public and private markets, and whether new technologies can strengthen post-trade processes and reduce risks and costs.

Throughout 2020, industry participants will be the ones to decide what technology will be adopted, whether that is distributed ledger technology or traditional architectures. The DTCC will use the next few months to evaluate feedback and responses from members to determine the next steps in the settlement initiative.

Project Ion’s objective is to explore alternative infrastructures and technologies to support accelerated settlement for US equities, while also looking at the potential of distributed ledger technology for this use case. By shortening settlement time, the DTCC hopes to improve efficiencies and minimize risk by reducing the time between trade execution and settlement.

“We are in the process of conducting a comprehensive technical assessment to determine an appropriate tech stack for a more scalable implementation,” Peve says. It’s too soon to know what that scalable implementation will look like at this stage, and so we are carrying out comprehensive due diligence around the right technology stack to move this forward, which may or may not be distributed ledger.”

The Proof of Concept

In early 2020, the market structure firm carried out a proof of concept (PoC) to evaluate the potential of a new Digital Accelerated Settlement Service. The PoC took five weeks and focused on a select number of concepts, including a mechanism for re-representing securities and cash, a netting engine for real-time projection capabilities of settlement obligations, a pre-funding settlement model, intraday and end-of-day settlement slices, atomic transfers for bilateral delivery and free of payment transactions, and integration for trading venues and clients via an API. The implementation also focused on the UI/UX to visualize how the business concepts and settlement workflow would work across a scalable architecture.

The PoC also looked to illustrate how DTCC’s existing technology stack, such as the DTCC’s Depository Trust Company (DTC) and the National Securities Clearing Corporations’ accounting systems could integrate with new technologies like DLT.

The proposed Digital Accelerated Settlement Service would sit alongside DTCC’s existing settlement and clearing services and would enable clients to access it through a common interface using a node for the new system and API abstraction for the existing architecture.

Peve says that clients will be able to decide between using the existing T+2 settlement service and the new T+0 or intraday service. The newly proposed project design would also look to enable full interoperability between tech stacks, enabling users to move assets between one settlement system and another to manage obligations.  Additionally, the technology would look to perform full synchronization between each participant’s ledger.

The market structure firm is now at the stage of demonstrating the PoC to clients, and consulting on what services they would find valuable and what technologies better suit the project’s objectives. As part of the feedback loop,  they are also identifying potential challenges that might arise. Although the DTCC couldn’t provide any deadlines for the next phases of Project Ion, Peve says that the consultation will take place throughout 2020.

She adds that the firm’s goal is not to drag out the project but that DTCC is mindful not to move too quickly in developing the service before receiving sufficient feedback from the industry,

In conjunction with Project Ion, the DTCC also designed a prototype for a modular service-based platform that would support the tokenization of assets through issuance, distribution, and secondary transfer. The case study named Project Whitney took 12 weeks to complete and similarly examined the potential of DLT to improve post-trade processing.

Building Blocks

The DTCC has been exploring the use of DLT since 2016 when it first published its whitepaper on leveraging the technology to solve long-standing operational challenges.

In September last year, the market structure firm developed a DLT governance tool using open-sourced code from the Hyperledger Explorer module, to enable a view into ledger activity and performance on a DLT node.

A month later, the firm released a whitepaper on the governance of DLT networks and shared its interests in becoming a central counterparty that would operate the platform, covering critical functions, adoption, security risks, and regulatory compliance.

In parallel to these projects, the DTCC is also in the process of replacing its Trade Information Warehouse (TIW) system with a blockchain-based platform jointly built by IBM, Axoni, and the industry consortium R3. The TIW platform, which handles the $12 trillion credit derivatives market, is one of the most ambitious industry-wide blockchain projects to date. The deadline for TIW has faced several delays over the years, mostly due to the complexity of technology and client priorities. The last reported deadline was March 2020 and DTCC could not provide an update on the revised go-live date.