The US equities clearinghouse suggests faster settlements after the GameStop saga


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The clearinghouse at the center of the GameStop trading frenzy has proposed cutting the time it takes to settle stock trades after broker Robinhood complained that the two-day process was a key factor in the decision to restrict stock trading.

The Depository Trust & Clearing Corporation, which operates the largest U.S. securities clearing house, announced on Wednesday a potential plan to halve the time it takes to settle millions of stock trades to one day by 2023.

The move comes three weeks after Robinhood chief executive Vlad Tenev alleged that the long-standing two-day deadline to reconcile deals and legally transfer assets from seller to buyer had an impact on its customers and the U.S. financial system.

The current system “exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev told Washington lawmakers last week, calling for immediate business dealings.

In volatile periods, the clearing house, which stands between the buyer and seller and oversees the transfer, may require more margin or insurance to cover any business errors.

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

Tenev’s proposal was backed by some of the largest market makers in the United States, including Ken Griffin, major shareholder of Citadel Securities, and Virtu Financial.

Charles Cascarilla, executive director of financial technology company Paxos, argues that the current system is out of date and the daily margin calculations are opaque to the industry.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

Paxos closes some equity deals for Credit Suisse, Société Générale and Instinet in the blockchain technology space and is preparing to ask US regulators for permanent approval.

DTCC, which had US $ 2,150 billion worth of US securities deals last year, said its proposal came from discussions with more than 100 institutions and could be carried out with existing technology. The subject has been researched since the market volatility last March, which meant customers had to post more margins.

“It is not a direct answer to the problem of meme stocks,” said Murray Pozmanter, head of clearing at DTCC. “We achieved our position after ongoing discussions with the industry.”

The frenzied GameStop trading broke records at National Securities Clearing Corporation, DTCC’s equity clearing house. January 28th was one of the highest-volume days in its history, and the 474 million transactions handled by the NSCC surpassed the high of last March by more than 100 million.

The clearinghouse’s margin claims increased from $ 26 billion to $ 33.5 billion. Robinhood’s requirements have increased tenfold. Within a few hours, it had to find $ 3 billion – a figure that was negotiated up to $ 700 million.

The part of the margin call calculation that Robinhood recorded, the so-called volatility component, could be reduced by up to 41 percent by switching to one-day billing, DTCC estimates.

However, shortening this timeframe is a long way off. Previous white papers on this topic had little resonance. “So that we can create a formalized schedule, we have to align the industry almost 100 percent,” said Pozmanter.

Some remain suspicious of Robinhood. Efforts to blame the settlement cycle or clearinghouse are “a smoke screen,” said the American Securities Association, which represents US small and regional financial services companies.

“The system was developed to identify insufficiently capitalized members. Because of the mismanagement we saw, the clearinghouse had to take action, ”said Chris Iacovella, General Manager.

While welcoming a move to mitigate risk, he found other broker-dealers facing the same call from DTCC and urged clients to post more margins. “That gives the customer back the choice,” he said.

DTCC also pushed back on Tenev’s proposal to move to an immediate settlement. This would mean that banks and market makers would not be able to reduce their positions with the clearing house. This process compresses the amount of cash required to fund daily transactions at NSCC by more than 98 percent.

Real-time settlement would mean pre-funding all trades. DTCC added that stocks would not be readily available to borrow or borrow to sell short.

“Real-time settlement could have a significant impact on overall market liquidity,” said Charley Cooper, executive director of R3, a blockchain software company and former chief of staff of the Commodity Futures Trading Commission. “Calls from Robinhood and others to introduce real-time billing feel like a jerky response to a far more nuanced challenge,” he added.

Ultimately, the cost of updating the back office systems to handle these transactions would be borne by brokers and money managers, not the brokers and market makers who run the calls, said Virginie O’Shea, founder of Firebrand Research, a capital markets consultancy.

Many institutions send spreadsheets to coworkers and staff have days to solve problems. “It’s not that easy for them to do business in a day,” she said. “People think it’s a highly electronic market, but that’s just for trading.”

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