May 16, 2021


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U.S. Clearinghouse Offers Faster Settlements After GameStop Saga

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The clearinghouse at the center of the GameStop trading frenzy has offered to reduce the time it takes to settle stock trades, following complaints from broker Robinhood that the two-day process was a critical factor in its decision to restrict certain exchanges of shares.

The Depository Trust & Clearing Corporation, which operates America’s largest securities clearinghouse, on Wednesday presented a potential plan to cut the time it takes to settle millions of overnight stock trades in half by 2023.

The move comes three weeks after Vlad Tenev, Managing Director of Robinhood, claimed that the long-established two-day period to reconcile deals and legally transfer assets from seller to buyer affected his customers and the financial system. American.

The current system “exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev said. lawmakers in Washington last week, and demanded that the agreements be settled instantly.

In times of volatility, the clearing house, who sits between a buyer and a seller and oversees the transfer, may require more margin, or insurance, to cover trade failures.

This can put a strain on brokers at a time when they are already under pressure. “The most logical way to reduce risk. . . is to shorten the settlement cycle, ”DTCC said in its white paper.

Tenev’s suggestion was supported by some of the biggest market makers in the United States, including Ken Griffin, principal shareholder of Citadel Securities, and Virtu Financial.

Charles Cascarilla, chief executive of financial technology company Paxos, argues the current system is outdated and daily margin calculations for the industry are opaque. “It’s a total black box for market players,” he said. “It’s clearing and settlement technology that is holding back our markets.”

Paxos settles some stock transactions for Credit Suisse, Société Générale and Instinet on blockchain technology, and is preparing to seek US regulators for permanent approval.

DTCC, which settled $ 2.1 trillion in U.S. securities transactions last year, said its proposal followed discussions with more than 100 institutions and could be carried out on existing technology. He’s been exploring the topic since the market swings last March, which meant customers needed to record more margin.

“This is not a direct answer to the ‘stocks meme’ problem,” said Murray Pozmanter, head of clearing at DTCC. “Our position is where we arrived after ongoing conversations with industry.”

Feverish GameStop-centric trading broke records at the National Securities Clearing Corporation, DTCC’s stock clearinghouse. January 28 was one of the highest transaction volume days in its history, and the 474 million transactions processed by the NSCC surpassed last March’s high of over 100 million.

The clearinghouse margin demands fell from $ 26 billion to $ 33.5 billion. Robinhood’s own needs increased tenfold. He needed to find $ 3 billion in a few hours – a figure he negotiated at $ 700 million.

The part of the margin call calculation that caught Robinhood, known as the volatility component, could be reduced by up to 41% by moving to single-day settlement, DTCC estimated.

But shortening that timeframe goes a long way. Previous white papers on the issue have had little success. “In order for us to establish a formal schedule, we need an alignment of almost 100 percent of the industry,” said Pozmanter.

Some remain suspicious of Robinhood. His efforts to blame the settlement cycle or the clearinghouse are “a smokescreen,” said the American Securities Association, which represents small regional US financial services firms.

“The system was designed to identify under-funded members. It was because of the mismanagement that we found that the clearing house had to act, ”said Chris Iacovella, Managing Director.

While welcoming an initiative to reduce risk, he noted that other broker-dealers have faced the same call from DTCC and asked customers to post more margin. “It leaves the choice to the customer,” he says.

DTCC also rejected Tenev’s suggestion to move to instant settlement. This would mean that banks and market makers could not offset their positions at the clearinghouse, a process that squeezes the amount of cash needed to fund daily transactions at NSCC by more than 98%.

Real-time settlement would mean funding all trades in advance. The stocks would not be as readily available for lending or for borrowing short, DTCC added.

“Real-time settlement could have significant ramifications for overall market liquidity,” said Charley Cooper, managing director of R3, a blockchain software company and former chief of staff at the Commodity Futures Trading Commission. “The calls from Robinhood and others to introduce real-time settlement sound like a knee-jerk reaction to a much more nuanced challenge,” he added.

Ultimately, the cost of upgrading the back office systems to process these transactions would fall on the brokers and asset managers, not the brokers and market makers leading the calls, said Virginia O ‘ Shea, founder of Firebrand Research, a financial market consulting firm.

Many institutions send spreadsheets to their peers, and people have several days to resolve issues. “It’s not that easy for them to settle deals overnight,” she said. “People think it’s a highly electronic market, but that’s just for trading.”

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