By Daeil Cha, Product at Chainlink Labs

Key Points

• Global markets are steadily shifting toward faster settlement cycles, reflecting a broad industry trend toward modernization and operational agility.
• Faster settlement offers significant market-level benefits such as enhanced risk mitigation, improved capital efficiency, and increased liquidity.
• Benefits can also be seen at the stakeholder level, with relatively short payback periods on upfront implementation costs.
• Chainlink Runtime Environment (CRE) is positioned to enable the next evolution of financial market infrastructure by facilitating atomic settlement and streamlining complex multi-party workflows.

Introduction

The recent successful cross-chain Delivery versus Payment (DvP) transaction between Kinexys by J.P. Morgan, Ondo Finance, and Chainlink serves as a compelling solution for secure, real-time settlement on public blockchain infrastructure. DvP is a core settlement mechanism that helps ensure securities are transferred only when payment is made. The Chainlink Runtime Environment (CRE) orchestrated the entire settlement process, leveraging an integration with Kinexys Digital Payments’ synchronized settlement workflow. CRE enables the atomic exchange of assets and payments across disparate networks, enhancing security and significantly reducing counterparty and settlement risk compared to traditional methods. While more operational and strategic adjustments are needed across stakeholders to adopt T+0 and eventually atomic settlement globally, markets are shifting towards faster settlement cycles as the value proposition of faster settlement is generally well accepted. 

In this report, we show that while reports indicate market participants must incur an upfront cost to enable faster settlement, the return on that investment is very quickly realized due to enhanced markets and efficiency gains on operational costs, capital, and risk. Moreover, CRE abstracts away the complexity of building settlement workflows, significantly reducing development costs to scale T+0 and atomic settlement workflows efficiently. Chainlink is set to help stakeholders realize these gains by paving the way for the next evolution of financial market infrastructure. 

Traditional Post-Trade Workflows

To delve into the value proposition of faster settlement cycles, we briefly outline the lifecycle of a securities transaction from trade execution to settlement. 

1. Trade Execution. A buyer or seller places an order with their broker or trading member, which is then sent to a trading venue. 
2. Trade Capture. After a trade is executed, its details, including security, price, quantity, settlement date, and counterparty, must be agreed upon by the buyer and seller. This involves allocation (dividing a large trade into smaller ones), confirmation (a market participant notifies its customers of trade details for verification), and affirmation (trade instruments and confirmations are verified by both parties to allow for settlement). 
3. Clearing. The counterparties’ obligations are calculated to guarantee settlement, often involving clearing houses (or central counterparties) that act as intermediaries between buyers and sellers. 
4. Settlement. The final stage of the trade, where the seller transfers securities to the buyer and the buyer transfers money to the seller. 

Note that this is a broad example of a settlement framework. In reality, the process involves a sequence of numerous market participants and infrastructures, and varies across different jurisdictions. More details of the settlement lifecycle can be found here for European markets and here for U.S. markets.

The State of Settlement: Past and Present

The global push to faster settlement is the latest development in a long history of efforts to modernize and de-risk financial markets. The objective of these efforts is to improve efficiency, reduce risk, and enhance capital mobility. Through the mid-20th century, manual and paper-intensive methods for settlement were very cumbersome, difficult to scale, and error-prone, especially during periods of market volatility. While some U.S. exchanges operated on surprisingly short settlement cycles early in the 20th century, settlement periods were later extended because intermediaries struggled to manage equity settlement, with some markets even settling on a monthly window. The “Black Monday” market crash of October 1987 triggered a global effort to improve clearing and settlement practices, with major market regulators ultimately recommending a set of nine guidelines, two of which are fundamental to this report:

• Delivery versus Payment. DvP is a mechanism whereby the delivery of a security occurs only if payment for that security occurs. A similar concept applies to the transfer of two securities, in which case the mechanism is called Delivery versus Delivery.
• Standardization Settlement Cycle. The report stipulated that final settlement should occur on a T+3 basis by 1992, marking the formal introduction of the “T+n” framework as a standardized target for market participants globally.

In the following years, major markets implemented faster settlement cycles, with the U.S. and many European markets transitioning from T+5 to T+3 in the mid-1990s. The European Union then shifted to T+2 in 2014, with the U.S doing the same in 2017. More recent shifts are detailed below.

• North America: On February 2023, the Securities and Exchange Commission (SEC) adopted a rule shortening settlement cycles for most broker-dealer transactions from T+2 to T+1, with the changes becoming effective May 28, 2024—a move driven by the Depository Trust & Clearing Corporation (DTCC)’s advocacy to significantly reduce counterparty default risks, especially after increased volatility during the COVID-19 pandemic. Initial results indicate robust success, with 94% of transactions affirmed by the DTCC cutoff time on trade date as of May 29, 2024, up from 73% in January 2024. Canada and Mexico adopted the T+1 settlement cycle to align with U.S. markets.
• Asia-Pacific: India transitioned to a T+1 settlement cycle in January 2023. Mainland China adopted a T+1 settlement cycle for DvP transactions in December 2022, and its domestic ‘A’ share market already operates with T+0 for securities and T+1 for cash. Other APAC markets are considering shortening their settlement cycles.
• Europe: The European Union operates on a T+2 settlement cycle, and the European Securities and Markets Authority (ESMA) published a report in November 2024, concluding that moving to T+1 has net benefits. As such, ESMA recommends October 11, 2027 as the optimal date for the EU’s transition to T+1. The UK has also announced its intention to transition to T+1 by year-end 2027, with Switzerland likely to coordinate with both the EU and UK.

Not only would the innovative transaction flow enabled by CRE fit the secular shift towards faster settlement cycles across global markets, but it can also raise fundamental new possibilities for the future of financial markets. 

Enhanced Markets Through Faster Settlement

Shorter settlement cycles offer a range of significant benefits to financial markets, including improved capital efficiency, reduced systemic risk, increased liquidity, and greater operational resilience. 

• Counterparty Risk Reduction. Faster settlement can significantly reduce counterparty risk, where one party fails to deliver the security or cash after the other has delivered theirs. The longer the settlement cycle, the greater the chance of prices moving away from traded prices and of a counterparty’s insolvency, especially in volatile markets. An ESMA survey of market participants showed that T+1 would reduce open positions at any point in time by as much as 50%.
• Capital Efficiency. As faster settlement reduces risk exposure, it also translates to lower margin requirements and clearing fund contributions. For example, the U.S. transition to T+1 saw aggregate margin posted in the clearing fund fall by $3 billion a day, freeing up about $750 billion annually for broker-dealers.
• Unlocked Liquidity. Faster settlement also allows sellers quicker access to the proceeds from a trade and buyers quicker access to purchased securities. As a result, both funds and securities are released faster, enabling accelerated reinvestment or usage of capital. For investors, this would bring benefits like improved price discovery and lower trading costs. 
• Operational Resilience. Transitioning to shorter settlement cycles requires a high level of automation and standardization across the entire transaction chain. As stakeholders streamline their trade operations, market participants will be less exposed to operational risks and settlement failures. For example, reconciliation is required to align records among multiple intermediaries, but it can be a manual and time-consuming process. Moving to faster settlement cycles necessitates more automation and straight-through processing across the entire ecosystem to avoid operational risks and settlement fails. 
• Case Study: India’s T+1 Shift. India completed its shift from T+2 to T+1 in January 2023, and one study suggests that the shorter settlement cycle reduced quoted spreads and improved market liquidity. The study measured the price impact of trades (at a fixed rupee amount) both before and after the accelerated settlement cycle was implemented for equities of different market capitalizations, and found that market depth improved most significantly for more illiquid stocks. 

Atomic settlement eliminates timing mismatches by ensuring delivery and payment occur simultaneously onchain, reducing principal risk even further than T+0. With programmable escrow mechanisms through CRE, parties can enforce deterministic settlement conditions, with no intermediaries required. For a detailed view into how CRE enables atomic settlement, see this post. We list some of the features of CRE here:

• Simultaneous cross-chain settlement that reduces counterparty and settlement risk.
• Automated, verifiable workflows that enhance operational efficiency.
• Near real-time finality, improving liquidity management and capital allocation.
• Transparent audit trails recorded immutably onchain, providing real-time visibility.
• Reduced intermediary costs across both public and permissioned systems.

Netting Considerations

In the context of trade settlement, “netting” is an agreed offsetting of mutual positions or obligations by market participants, which reduces a large number of individual positions or obligations to a smaller number of net positions. This process involves calculating the net settlement positions and their reduction to a bilateral or multilateral net amount. Netting is believed to improve efficiency, optimize capital usage, and reduce risks across the financial system. That said, shorter settlement cycles could alter the benefits of netting in nuanced ways. The shift to T+1 appears to have tradeoffs with market participants, with some indicating lower overall netting efficiency, a higher load on central intermediaries, and a potential to increase operational risks due to the compressed time to process and instruct daily netted amounts. On the other hand, participants would benefit from lower margin requirements. 

Shifting to T+0 is more challenging given the possibility that “every transaction be funded instantly and individually.” FX markets could be especially challenged in the absence of netting under T+0 since every counterparty would incur bilateral risk exposures to each other. The SEC ruling on settlement in May 2023 indicates that the U.S. would need to overhaul its clearing and settlement infrastructure in order to achieve T+0, with a particular concern for maintaining multilateral netting. Interestingly, however, at least one study found that there was no loss in benefits from multilateral netting for a settlement cycle of one hour in U.S. equities, which is a surprisingly short time window.

We should note that settlement via blockchain is not necessarily instant in the sense that a trade is automatically settled when it is executed. Given that trade settlement on a blockchain is a relatively novel frontier, the nuances of clearing and settlement (including netting) in the context of blockchain rails have yet to be further explored. On EVM chains where transactions in a mempool are ordered before blocks are proposed and finalized, there could be a potential to apply some form of bilateral or multilateral netting across participants as blocks are being constructed. With CRE, Chainlink is set to help market participants explore these possibilities.

Benefits to Individual Stakeholders

The potential benefits to industry participants have long been recognized as a strategic opportunity. In 2012, the Boston Consulting Group published a study that estimated the financial and operational net benefits for U.S. market participants by transitioning from T+3 to T+2 settlement, and from T+3 to T+1. 

Cost-Benefit Analysis of Shifting from T+3 to T+2

The study showed that the shift to a T+2 operating model would require about \$550 million in incremental investments across the industry. For large players, the average investment would range from \$1 million to $5 million, primarily involving enhancements to interfaces, limited systems changes, and costs associated with end-to-end analysis and testing. Medium and smaller players would incur lower investments. The study also projected the annual benefits for various stakeholders in operational cost, capital efficiency, and risk.

• Operational Cost Savings. The industry was projected to realize approximately $170 million in annual operational savings, primarily from reductions in manual processing. 
  • Institutional broker-dealers would see up to a 5% reduction in overall operations costs (or about $45 million in annual savings) through systematic usage of enhanced and accurate cross-industry Settlement Instructions (SIs), increased affirmation rates, and improved settlement finality.
  • Custodian banks would achieve between 10-15% in cost savings, or $40 million in annual savings from reduced manual processing, especially through increased standardization and automation of communication, and improved send/receive instructions, confirmation/affirmation, and exception management. 
  • Buy-side firms were projected to see about a 2% reduction in operational costs.
  • Retail broker-dealers would realize a 2-4% reduction in operating costs (or $55 million in annual savings) largely from the elimination of physical certificates.
• Capital Optimization. T+2 would lead to reducing clearing firms’ fund requirements, with an estimated 15% reduction in the average clearing fund amount during typical periods and a 24% reduction during high volatility periods. This capital release extrapolates to about $25 million in annual returns to industry participants.
• Risk Reduction (Buy-Side Counterparty / Mark-to-Market Risk). The total estimated reduction in expected buy-side losses was up to $200 million, including a 35% reduction in stress scenario losses and a 40% reduction in major failure scenario losses. 

When only accounting for initial operating cost savings, the payback period across the industry for investing in the T+2 model was expected to be about 3 years. This reduced to 1.4 years if buy-side risk reduction was also included. While these figures are somewhat outdated and potential cost savings have increased significantly, they show how savings in the long run outweigh initial costs.

Cost-Benefit Analysis of Shifting from T+3 to T+1

BCG estimated that implementing a T+1 model would require about $1.8 billion in incremental investments across the industry, given more substantial changes would be required, such as transitioning systems from batch to near real-time processing. The overall absolute benefit, however, was projected to be much greater than with the transition to T+2.

• Operational Cost Savings. The study estimated that the total potential operational savings would be about $175 million annually, but up to $370 million assuming broad adoption (which some respondents were skeptical of). As such, the conservative projection of operational savings was not significantly larger compared to the shift to T+2.
• Capital Optimization. The move to T+1 implied a 25% reduction in the average clearing fund amount during typical periods, and a 37% reduction during high-volatility periods.
• Risk Reduction (Buy-Side Counterparty / Mark-to-Market Risk). The total estimated reduction in expected buy-side losses was up to $410 million, including a 70-75% reduction in stress and major failure scenario losses compared to T+3. 

While the payback period for investing in the T+1 model was 10 years (only accounting for operating cost savings), it would be about 2.2 years if all benefits were included. In fact, for buy-side participants, the risk reduction benefits shortened the payback period to less than one year.

Pathways to Institutional Adoption of Atomic Settlement

Adopting faster cycles, such as T+0 or atomic settlement, represents a significant shift in financial market operations and regulation. While widespread adoption of T+0 and atomic settlement may be premature at the moment, given the upfront investment required across the financial landscape, it is a potential long-term strategic goal, particularly after the successful transition to T+1 settlement. We will not expand into all the changes needed to implement a faster settlement paradigm, but below are a few key considerations for stakeholders exploring atomic settlement via blockchain technology.

• Operational overhaul. Atomic settlement will likely require a redesign of how markets operate, shifting away from batch processes to near real-time processing across all stages, including trade matching, allocation, affirmation, and confirmation. 
• Technology investment. Accelerating faster than T+1 would require changes in systems and processes that would likely involve new technologies that are not yet deployed at scale in financial markets. 
• Liquidity pressure. Stakeholders would need to adjust their liquidity strategies due to the need for all transactions to be pre-funded.
• Regulatory coordination. Implementing faster settlement may require significant legislative and regulatory amendments to provide legal certainty around post-trade processes, as seen in precedents in both U.S. and EU markets. Also, coordinated transitions across major global jurisdictions like the EU, UK, and North America are crucial to avoid increased complexity and costs from misaligned settlement cycles. This transition requires robust industry-wide collaboration and governance structures to plan, develop, and test necessary operational and technological changes.

Chainlink Runtime Environment can significantly aid institutional adoption by enabling near real-time processing, automated workflows, and seamless interoperability across both traditional and emerging blockchain systems. CRE can also help accelerate regulatory coordination as it can automate, secure, and make transparent complex multi-party workflows and enforce policies across diverse systems.

Conclusion

The successful cross-chain DvP transaction enabled by CRE highlights the growing momentum towards faster and more secure settlement. While transitioning to T+0 or atomic settlement requires industry-wide adjustments and investments, the benefits in risk reduction, capital efficiency, and liquidity are substantial and quickly realized. Chainlink Runtime Environment is poised to play a crucial role in this evolution, enabling near real-time processing and automated workflows essential for the future of financial market infrastructure. By embracing these technological advancements, institutions can gain a significant structural advantage in the evolving global financial landscape.

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This post is for informational purposes only and contains statements about the future. There can be no assurance that actual results will not differ materially from those expressed in these statements, although we believe them to be based on reasonable assumptions. All statements are valid only as of the date first posted. These statements may not reflect future developments due to user feedback or later events and we may not update this post in response.