Push for Real-Time Settlement APIs
Fintech clients increasingly expect T+0 settlement with full traceability, according to CTOs from Plaid and Modern Treasury. In a recent podcast, they stated that the most successful APIs will be those that abstract away multi-ledger complexity and regulatory reporting. This aligns with a broader industry push for real-time settlement to reduce counterparty risk and lower collateral requirements.
- The U.S. now has two key real-time payment networks: The Clearing House's RTP network, which launched in 2017, and the Federal Reserve's FedNow service, which went live in 2023. Both systems facilitate irrevocable payments 24/7/365 and utilize the ISO 20022 messaging standard for rich data transmission. However, they differ in ownership, transaction limits, and settlement models, with RTP using a pre-funded joint account and FedNow settling through financial institutions' master accounts with the Fed. - The Depository Trust & Clearing Corporation (DTCC) is advancing T+0 settlement in securities through its Project Ion platform. This initiative uses distributed ledger technology (DLT) and operates in a parallel environment alongside traditional systems, processing over 100,000 bilateral equity transactions daily. While the existing system remains the authoritative record, Project Ion is designed to support netted T+0, T+1, and T+2 settlement cycles. - The global migration to the ISO 20022 standard is a critical enabler for real-time payments, creating a common language for financial transactions worldwide. This standard supports enhanced, structured data within payment messages, which improves analytics, helps to detect fraud, and enables straight-through processing, reducing manual errors. Major systems like the UK's CHAPS and the Fed's Fedwire are adopting this standard. - Real-time gross settlement (RTGS) systems require pre-funding, where participating banks must deposit liquidity (cash or collateral) with the central bank before initiating payments. This model ensures that settlement can always be completed but introduces liquidity management challenges for firms, as they cannot use shares from unsettled trades as collateral. - The move to faster settlement cycles like T+1 and T+0 can significantly reduce margin and collateral requirements for market participants. By shortening the time frame of exposure, the risk of default is lowered, allowing for more efficient use of capital and quicker reallocation of collateral. - While both buy-side (e.g., hedge funds, asset managers) and sell-side (e.g., investment banks) firms are impacted by the push to real-time settlement, their adoption drivers differ. Buy-side firms are often focused on leveraging faster settlement for better liquidity management and investment opportunities, while the sell-side is concerned with providing market-making services and managing the operational shift from batch processing.
