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When the world emerges from the COVID-19 pandemic, we will see a fundamental transformation of how things are done in large and small ways. And across every sector of the economy, the acceleration of digital transformation will likely be one of the most significant changes to business as usual.
Some enhancements will be directly tied to protecting public health, but many others will be driven by the need to reimagine how work is performed and how business processes are managed as the industry evolves in response to this inflection point. In some cases, the crisis will speed up transformation projects already in progress, especially as many firms have already been actively exploring new approaches to further reduce costs and risk. For instance, increasing automation and digitalization were already high atop the agenda of many organizations, but the pandemic has reinforced the criticality of eliminating manual processes in favor of digital alternatives that can be performed regardless of where employees are physically located.
The benefits of this were crystal clear to us in mid-March when we transitioned our staff globally to a remote work environment. The automated and dematerialized workflows we already had in place enabled seamless execution despite record-setting market volatility. Even as trading activity reached about three times normal levels, we continued to provide stability and certainty to the marketplace. In fact, the only area of our business that experienced disruption was physical securities processing, which, while accounting for less than 2% of assets under custody at DTC, requires human interaction on-site. The lesson learned is that, despite the industry’s progress in automating trade lifecycle processes over the course of many decades, digitization will become an even bigger priority as financial institutions continue to embrace fintech innovations and seek more efficient operating models.
Call for transformation
The digitization of securities processing has been an ongoing evolution across the globe, including in the US, and it has intensified in recent years with the emergence of distributed ledger technology.
We’ve been at the forefront of exploration and experimentation for several years because we see the promise of the technology. At the same time, our experience also reminds us of its current limitations. To build consensus around these issues and foster collaboration across the industry, DTCC has been actively sharing our expertise in white papers, engaging in open source forums like Hyperledger, developing prototypes and case studies, and laying out a vision around foundational topics like governance and security.
The next step in this evolution will be built upon key foundational work that has already been achieved by the industry.
Recently, the US accelerated the settlement cycle to T+2 in what was a highly complex and time-consuming initiative, which reinforced that the biggest challenge was not technology – as DTCC can and does provide T+1 and T+0 settlement today – but rather process and procedure. The benefits of accelerated settlement – reduced market risk and significantly lower margin requirements – prompted almost immediate discussions among firms on ways to achieve additional value through initiatives like settlement optimization, including considering the possibility of intraday movement and settlement of money and securities instead of the traditional focus on end-of-day settlement.
Convergence of accelerated settlement and DLT
While accelerated settlement and settlement optimization are possible using existing technology, DLT creates new opportunities to reimagine post-trade processing for the future, especially when combined with the best of today’s capabilities in a seamless manner giving clients choices for how to best manage their settlement exposures. As the evolution of settlement converges with the fintech revolution, we are advancing a new initiative to further enhance the settlement process in the public markets, known as Project Ion. This future vision of an alternative digital settlement service, with the potential to offer the benefits of accelerated settlement, would retain the advantages of central netting and prevent fragmentation of the clearing and settlement ecosystem.
To gather industry input, DTCC recently developed a working proof of concept (POC) designed to help clients visualize key business model workflows and novel implementations. Through a rapid and iterative approach, we will partner with the industry to validate whether Project Ion brings the broadest industry benefits, identify potential barriers and explore the feasibility of moving towards accelerated settlement, employing a modern platform underpinned by DTCC’s proven infrastructure.
The role of market infrastructure
Developing a new Digital Accelerated Settlement Service could fundamentally change current market structure, and we’re excited to help lead this effort in collaboration with our clients and industry partners. Financial market infrastructures are uniquely positioned to help guide this transformative work because we have the expertise to understand the larger impacts on the full lifecycle, the numerous interconnected processes and how to bring all these pieces together to create a more modern and efficient system for the future. In addition, organizations like DTCC, which are user owned and governed, can take a long-term view and can focus on what’s in the best interest of the industry.
From the paperwork crisis of the late 1960s until today, the industry has a legacy of coming together and collaborating in times of crisis to build a more secure and efficient system through the use of greater automation and digitization. That is the moment where we find ourselves today, and we are committed to finding the right path on our strategic transformation to advance the industry’s digital journey.
Murray Pozmanter, Managing Director DTCC, is Head of Clearing Agency Services and Global Operations and Client Services.
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