Would T+0 be possible today, and if so, how?
The May 2024 shortening of the securities settlement cycle from trade date plus two (T+2) to trade date plus one (T+1) in North America has the potential to reshape the financial market landscape. Shortening the settlement cycle by a business day is intended to increase efficiency, improve liquidity and collateral management and reduce risk in the market. Naturally, this move is prompting interest in the next stage in market efficiency, the move to same-day settlement (T+0).
While there is no clear timeline on T+0 across the globe, it seems likely that regulators will begin to eye further shortening of settlement windows. India is already planning to implement optional end of day settlement in preparation for a move to real-time settlement scheduled for March 2025.[1] This T+0 initiative by India is the first of its kind worldwide and could set the stage for other countries to follow.
The move to T+0 is not as simple as cutting a day out of the settlement cycle. Effective T+0 implementation will require significant changes to financial markets, increasing pressure on back offices to automate and streamline their systems and processes. As market participants plan for the move to T+1, some may already be considering these changes and how to accommodate them.
Looking at the options today, there are two ways to enable T+0: digitization and end of day batch settlement. Through digitization, trades are executed and settled in real-time, although we are still years away from a fully digitized asset ecosystem. The more near-term solution to T+0 is end of day batch settlement, where trades are batched and settled by close of business.
Enabling T+0 in the Future: The Digital Asset Ecosystem
The move to T+0 and a real time settlement cycle will require fundamental changes to financial markets and processes, as well as significant upgrades in technology across both buy and sell-side participants. The immediate settlement of trades is a significant shift from how the market currently operates. Even with T+1, trade communication, cash movement and foreign exchange processing can occur at the end of the day and overnight on trade date. Yet real time settlement is a hallmark of digital assets (traditional assets, such as bonds and equities, that have been converted to digital form) and tokenization.
In a digital asset ecosystem, execution and settlement of trades occur simultaneously and the distributed ledger technology (DLT) serves as a single source of data for all counterparties. While utilizing DLT will be a significant benefit in the long run, most market participants do not have the technology currently integrated into their systems to fully support digital assets. However, various global market participants are taking steps to enable tokenization. For example, the Depository Trust Clearing Corporation (DTCC) announced its acquisition of Securrency, now known as DTCC Digital Assets,[2] to leverage its capabilities such as the on-chain transaction signing ability to instantly settle trades against tokenized cash.[3] DTCC also has its Digital Securities Management (DSM) platform which provides an optional blockchain-agnostic capability to tokenize securities that are managed by DSM.[4] While moving from batched to real-time settlement would increase intraday settlement risk, DTCC Digital Assets and DSM are working to reverse that and unlock new opportunities for liquidity, efficiency and compliance.
Another example of the industry moving to tokenization is the Singapore Exchange (SGX CDP) making a block-chain enabled bond issuance platform by Marketnode available to market participants.[5] The platform utilizes DLT and tokenization so issuers can incorporate digital assets into their offerings and increase operational efficiency and transparency.
Enabling T+0 Today: End of Day Batch Settlement
While a digital asset ecosystem may be the future of the securities industry, most agree this transformation is years away. The more immediate way to achieve T+0 is end of day batch settlement, where trades can be received at any point throughout the day, batched and settled at close of business. With end of day processing, service providers have until the end of the day to process trades, which allows market participants to continue using the multilateral netting process. Less market innovation is required to accommodate this model, making it an easier transition from T+1 to T+0. An end of day cycle would also allow the markets to transition over time using a hybrid model of legacy and tokenized securities. End of day batch settlement can offer faster, more efficient processing than T+1 and further reduce market risk, while still retaining the benefits a longer settlement period can offer. This makes end of day batch settlement a more feasible and realistic transition to T+0.
End of day batch settlement is not without its challenges. Global markets dealing with time zone differences will need to redesign their operating models, likely adding resources to accommodate overnight processing. It is also important to note that prefunding of cross-border transactions would be a requirement to provide currency availability on trade date. In addition, sufficient time must be allowed to validate the accuracy and legitimacy of trades, which could be difficult for regulators and exchanges.
T+0 is Within Reach
In the ever-evolving financial landscape, a marketplace that enables T+0 settlement can cultivate efficiency and risk mitigation. Real-time settlement and digitization will require significant changes to systems and processes, making end of day batch processing a more feasible and immediate transition method. Regardless of which methodology is used, many questions remain as to how to align the various markets and regions, as global symmetry will be key to efficiently functioning marketplaces.
While there is no certainty that markets will adopt T+0, it is likely that regulators will look hard at it in the coming years. Although there will be greater challenges to overcome than the shift from T+2 to T+1, the benefits will also be far greater and the technology is already available today to enable such a shift, making T+0 a real possibility.
[1] India to roll out optional T+0 from March 2024 as part of roadmap to instantaneous settlement
[2] DTCC Signs Definitive Agreement to Acquire Securrency Inc.
[3] Securrency Private Markets Token Solution White Paper
[4] Digital Securities Management (DSM) | DTCC
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