Market Participants See Potential in DLT and Tokenization to Shorten Settlement Cycle

Market Participants See Potential in DLT and Tokenization to Shorten Settlement Cycle

by November 25, 2022

The clearing and settlement landscape is on the brick of a major transformation, driven by the accelerated pace of technology development and adoption. In the coming years, market participants expect the settlement timeframe to substantially shorten as technology continue to advance and as more jurisdictions move to a T+1 settlement cycle where the settlement of a transaction occurs less than 24 hours from the day of transaction, a new study by Citi found.

The second edition of Citi’s Securities Services Evolution whitepaper, released on November 02, 2022, shares the results of a survey of nearly 300 industry participants including custodians, banks, broker dealers, asset managers and institutional investors. The survey sought to understand their views and predictions for the future of the global securities market ecosystem.

Findings from the study show that market participants from around the world increasingly believe that shorter settlement cycles are the forthcoming reality.


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Of the ~300 market participants polled, 51% think T+1 will be the prevailing settlement timeframe for equities to be T+1 by 2026, up seven points from last year.

The survey also found a notable increase in those regarding immediate atomic settlement as the likely 2026 settlement timeframe, from 18% last year to 20% now.

Overall, 85% of respondents expect settlement to be at T+1, T+0 or atomic over the same timeframe, versus 78% in 2021.

The prevailing settlement timeframe for equities by 2026, Source: Securities Services Evolution 2022, Citi

The prevailing settlement timeframe for equities by 2026, Source: Securities Services Evolution 2022, Citi

This rise, the report says, can be explained by a drive from regulators to accelerate settlement cycles.

In the securities industry, the settlement period refers to the time between the trade date – the day on which the order was executed – and the settlement date – the date when a trade is final and that the buyer must make payment to the seller while the seller delivers the assets to the buyer.

The abbreviations T+1, T+2, and T+3 refer to the settlement dates of security transactions that occur on a transaction date (“T”) plus one day, plus two days, and plus three days, respectively. T+0 refers to same day settlement, while atomic settlement refers to real-time, immediate settlement.

Currently, most securities transactions settle within a couple of days of the actual trade date, but a combination of better technology, the sheer volume of securities trading and regulatory momentum have allowed this window to be reduced over time.

Europe, in pioneer in the domain, moved to a T+2 basis back in 2014. This was followed in 2017 by the US, Canada, Mexico, Peru and Argentina. Leading Asia-Pacific (APAC) markets including Australia, India, Indonesia, Japan, Hong Kong, Korea, New Zealand, Singapore and Taiwan, have also migrated to T+2.

Now, several jurisdictions have announced their intention to shorten settlement cycles even further and move to a T+1 basis. India is taking a phased approach to this migration, which commenced in February 2022, while the US and Canada are planning to adopt T+1 in 2024.

DLT and tokenization

Changes in securities settlement processes are also being driven by the rise of digital assets. Renewed interest in the sector over the past two years has prompted industry participants to start exploring the potential of distributed ledger technology (DLT) and tokenization in securities markets, the report notes.

Last year, Deutsche Börse, Deutsche Bundesbank and Germany’s Finance Agency completed the testing of a blockchain-based settlement interface for electronic securities. The pilot made use of tokenization and DLT to digitize securities and make the settlement process much faster and more efficient.

In the broader European Union (EU), the European Securities and Markets Authority (ESMA), the bloc’s securities markets regulator, is currently developing the trading and settlement of tokenized securities, or digital representations of traditional securities, utilizing DLT.

In Switzerland, the Swiss National Bank, the BIS Innovation Hub and the financial infrastructure operator SIX have been collaborating on Project Helvetia since 2020, an initiative which focuses on exploring the settlement of tokenized assets in central bank money.

Interest in digital assets was reflected by the market participants surveyed by Citi with 88% of those polled by the bank indicating that their organization was either actively participating in, or exploring use cases for digital assets, blockchain or DLT.

Engagement of digital assets, blockchain or DLT, Source: Securities Services Evolution 2022, Citi

Engagement of digital assets, blockchain or DLT, Source: Securities Services Evolution 2022, Citi

Market participants have clear expectations of tokenization, with more than 90% of respondents believing that tokenization will be either extremely or moderately valuable in terms of increasing market liquidity.

The benefits of tokenization, Source: Securities Services Evolution 2022, Citi

The benefits of tokenization, Source: Securities Services Evolution 2022, Citi

They are also optimistic on the possible cost savings opportunities brought about DLT market infrastructure. A quarter of respondents anticipate that DLT-based market infrastructure could cut post trade processing costs by 31-50% and 54% expecting it will produce savings of 10-30%.

DLT and cost reduction, Source: Securities Services Evolution 2022, Citi

DLT and cost reduction, Source: Securities Services Evolution 2022, Citi

 

Featured image credit: edited from Freepik

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