Following the Gamestop/Reddit/Robinhood melodrama, the discussion of when trades settle has become a topic of concern. Currently, if you purchase shares from a broker you must pay for those shares within two days of the trade (T+2), something the Securities and Exchange Commission adopted in 2017 (previously T+3). Today, the Depository Trust & Clearing Corporation (DTCC) is advocating to shorten the settlement cycle within two years to T+1.
Based on extensive industry engagement conducted throughout 2020, early indications suggest that market participants increasingly favor the move to T+1 to take advantage of capital and operational efficiencies, and benefit from significant risk reduction and a lowering of margin requirements, especially during times of high volatility and stressed markets. Based on simulations detailed in the paper, DTCC estimates that a move to T+1 could bring a 41% reduction in the volatility component of NSCC’s margin.
DTCC explains that there are immediate benefits to T+1 including lower margin requirements and reduced market risk. DTCC reports that an average of over $13.4 billion is held in margin every day to manage counterparty default risk in the system. Shortening the settlement cycle could reduce some of this risk.
During the Gamestop pump, Robinhood had to raise new capital to cover trades. By shortening the settlement cycle emergency funding may be diminished.
DTCC is key to the global financial services industry. In 2019, DTCC’s subsidiaries processed securities transactions valued at more than U.S. $2.15 quadrillion. Its depository provides custody and asset servicing for securities issues from 170 countries and territories valued at U.S. $63.0 trillion.
Murray Pozmanter, Head of Clearing Agency Services and Global Business Operations at DTCC, says the time to settlement equals counterparty risk.
“We have been working collaboratively with a wide 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 increase these efforts to forge consensus on setting a firm date and approach to achieve T+1.”
And what about T0? Or immediate settlement (perhaps handled by blockchain technology)? Not quite there yet but perhaps someday.
If you are curious, DTCC has written a white paper on its belief the securities industry should move to T+1.