03.24.2017

OPINION: Blockchain Not the Swiss Army Knife of Settlement

03.24.2017

The US Securities and Exchange Commission adopted an amendment on Wednesday that requires broker-dealers to shortened settlement cycle by the beginning of September.

Only the firms that have been living in denial should worry about meeting the SEC’s September 5 deadline.

Wall Street has been working on the migration to settlement by two business days after trade date (T+2) from three days after trade date (T+3) since early 2015.

The Industry Steering Group and the Depository Trust & Clearing Corp. have been working with broker-dealers non-stop for the past two years to define and implement the migration process, establish the and set up the necessary testing regime.

Wednesday’s announcement was little more than completing a footnote for the project.

The milestone also brought out the backers of digital ledger technology out of the woodwork shouting that settlement would be improved if the industry would adopt a DLT-based infrastructure for settling trades.

For many manually intensive settlement processes, such as for various over-the-counter instruments, DLT-based processes work well and shrink the settlement window remarkably.

However, DLT architecture does not need to be the answer for every settlement problem.

Ever since the New York Stock Exchange had to keep trading to four days a week in the 70s so that members could process all of their trades, Wall Street and the DTCC have worked hard to improve the settlement of equities trades continuously.

If DLT had been more advanced when the industry began its discussion of moving to a T+2 cycle, it might have had a seat at the table.

But since the earliest DLT pilot projects will not happen until the second half of this year, the industry was not going to wait for a nascent technology to mature before moving to the shorter settlement cycle.

The DTCC is one of the biggest backers of DLT and looks to implement it in the next version of the cooperative’s Trade Information Warehouse. But not all processes need or would benefit greatly from implementing a distributed ledger, such as cash equities.

It is all a matter of using the proper tool for the proper job.

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