Atomic settlement: if you have Amazon Prime, you already understand the process

Author: Alisa DiCaprio, R3

TL;DR Atomic settlement is the instant exchange of assets. How do you implement such a thing? Ask Amazon.

We live in a time where we expect immediate delivery of everything from our payments to our toothbrushes. And while delivery has definitely sped up, it isn’t instant. Blockchain introduces a way that it could be.

Atomic settlement is the instant exchange of two assets that are linked, such that the transfer of one occurs only upon transfer of the other one. This concept is particularly relevant for the financial sector, where today, it takes two days for securities to settle (T+2). The possibility of atomic settlement (T+0) has contributed to regulators’ efforts to move to one day settlement (T+1) in the near-term.

While it’s clear that faster is better, instant is a great unknown. Amazon provides some insight into what the path to atomic settlement will look like. From 2019-2022, Amazon cut its standard Prime shipping times from two-day (T+2), to one-day (T+1), to same-day delivery (T+0) for some cities.

Amazon implemented T+0 delivery in three concurrent phases, which we can expect would be similarly followed for T+0 settlement in financial services.

1. Offer slower and faster together

Batching orders is one reason that delivery times in both finance and Amazon Prime are slower than T+0. And you might even choose this option, despite your impatience.

Consider the last time you ordered several items from Amazon. At checkout, you ‘re asked if you’d like to ship them one-by-one, or altogether on your Free Amazon Day Delivery. You might choose the single batch option for a number of reasons: packaging is less wasteful, theft is less likely, the carbon output is lower since the driver makes fewer trips, and you don’t have to constantly hunt for boxes in the lobby.

In the same way, transactions in the financial sector also extract value from longer settlement times. Multilateral netting reduces the number of transactions (and the potential errors and fees) that two institutions need to make. It also has important liquidity benefits. Instant finality via atomic settlement has different benefits, so one proposal has been to offer it as part of a settlement choice option.

2. Execute more frequently

Because execution is instant (or T+0) in atomic settlement, to get there, you need to invest in updating the infrastructure to accommodate more frequent execution.

For Amazon, the first step towards same-day delivery was to hire more people, build more warehouses, and run more frequent delivery cycles. Much of this also involved Amazon constructing their own logistics flows by buying delivery trucks and airplanes.

Of course, this is expensive! When Amazon shifted from 2-day to 1-day shipping it took on $800 million in additional expenses.

The cost of speedier securities settlement is equally high. The incremental investment needed to move from T+3 to T+2 was estimated by BCG at around $550 million. That same report estimated that the move from T+2 to T+1 will require an estimated $1.77 billion for the systems and process upgrades alone. This would cover things like standardization of data formats, platform enhancements, and increased automation.

The securities industry still needs to hire lawyers to update rules, run working groups to agree on the schedule and extend payment window opening times.

3. Reconstruct the process

Atomic settlement is completely different from what any existing infrastructure was built to do. This means that ultimately, there needs to be a reorganization of how a transaction flows through the system.

For Amazon, this meant that as they’ve reached the limits of increasing transaction frequency, they’ve begun building mini fulfillment centers that work differently than traditional warehouses, working with the FAA to license Prime Air drones and testing delivery robots.

For the securities industry, T+0 settlement would require what DTCC has called a “radical reengineering” of the existing process. This will include the need to reconsider how liquidity is sourced and how records are aligned. There is widespread agreement that this needs to happen, but it will take time. This is especially true in an ecosystem as dense as securities where there are multiple counterparties and processes that need to be brought along.

In the end, atomic settlement is already here! Fully digital exchanges like SDX in Switzerland use atomic settlement, though in a limited way. For the broader financial markets, DTCC has already begun exploring what a T+0 world might look like via Project Ion. Bringing instant finality into securities settlement will be a long path, but the benefits of smaller movements in this direction are already being felt.