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The company, which provides broker clearing and settlement services, suggested cutting the time it takes to clear a trade as the GameStop controversy led brokers like Robinhood to restrict trading.
The Depository Trust & Clearing Corporation (DTCC) explained what a T + 1 or one day settlement period would look like for the trading industry and proposed a two-year plan to shorten the settlement cycle.
It currently takes two business days to complete a trade, which is a transfer of securities and cash between parties.
“The time to settlement is the counterparty risk that can be increased in the event of market shocks. This can also lead to the need for higher margin requirements, which are critical to protecting the financial system and investors from solid default,” said Murray Pozmanter, head of clearing agencies and global business processes at DTCC.
“We have worked with a broad cross-section of the industry to build support for further shortening the current settlement cycle over the past year, and we have outlined a plan to step up that effort in order to reach consensus on a firm deadline and approach achieve T + 1, “he said.
Brief squeeze controversy
After the epic short squeeze on GameStop stock earlier this year, the two-day billing standard has come into the spotlight.
In light of the DTCC’s increased capital requirements, stock trading apps like Robinhood stopped buying certain stocks for fear the company could face a liquidity problem if market volatility persists.
Robinhood raised $ 3.4 billion in about 72 hours to prop up its balance sheet and lift some of the restrictions.
However, the company’s CEO, Vlad Tenev, blamed the two-day trading agreement known as T + 2 for some of the clearinghouse deposit problems during the GameStop mania.
“The existing two-day deal deadline exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev said last week in a testimony to the House Financial Services Committee.
“The clearinghouse deposit requirements are designed to mitigate risk. However, last week’s wildlife market activity has shown that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that create new risks,” he said.
The two day standard
Most retail transactions, which are processed through a broker and then through a clearing house, are processed two business days after the day the order is filled.
Some consider T + 2 to be out of date and a major driver of increased capital pressures in the industry.
According to DTCC, an average of $ 13.4 billion in margins is held daily to manage risk in the trading system. The organization noted that moving to T + 1 could potentially reduce their margin by 41%.
The DTCC outlined its ideas in a white paper entitled “Moving Forward Together: Leading the Industry to Accelerated Settlement,” which highlighted the benefits of a T + 1 settlement cycle, including cost savings, reduced market risk and lower margin requirements.
The company said DTCC does not have the regulatory or legal power to unilaterally change the settlement cycle, but the organization continues to take a leadership role in reducing the settlement cycle to a one-day settlement.
While Tenev has requested real-time settlement, Pozmanter said the most pragmatic thing would be to reduce the settlement process in stages.
“Immediate settlement would require unsecured pre-financing of deals, which could limit market liquidity,” the DTCC said.
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