The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced a timetable for the first phase of settlement optimization, a significant enhancement aimed at removing an entire market day of settlement exposure without eliminating a calendar day from the standard trade settlement process.

Based on support and feedback from the Settlement Optimization Working Group, DTCC is taking a phased approach to the implementation of Settlement Optimization, beginning with Night Cycle Re-engineering. 

By focusing initially on re-engineering the night cycle, a processing batch occurring in the overnight hours, DTCC seeks to significantly increase settlement rates going into the next morning. Today’s more sequential algorithm results in a night cycle settlement rate of about 45% for all transactions during that period. However, DTCC estimates it can increase that same settlement rate to as high as 90% as a result of the re-engineering.

This increase in settlement in the night cycle is a prerequisite for the Working Group to explore the implementation of Settlement Optimization Phase 2, the introduction of morning settlement in addition to today’s end-of-day settlement process. By moving from the afternoon of settlement date to the morning before market open, the risk associated with funds settlement will be reduced.

“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,” 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 U.S. equities market structure to life.”

The new approach to the night cycle introduces an advanced settlement processing algorithm capable of evaluating 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.

The Settlement Optimization Working Group, formed in September 2017 and now with about 50 members including major service providers, gave important feedback on the re-engineering proposal including the proposed timeline and key processing times. 

The launch of Night Cycle Re-engineering is subject to regulatory approval, as are the additional phases that will be addressed over time.