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T+1 Inches Closer After Robinhood GameStop Frenzy

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What You Need to Know

  • DTCC has released a two-year industry road map for shortening the settlement cycle.
  • Early indications suggest that market participants increasingly favor the move to T+1.
  • Moving to a T+1 settlement cycle will be a major undertaking, SIFMA's Ken Bentsen says.

The trading frenzy in GameStop shares in late January is spurring a move to one-day trade settlement.

The Depository Trust & Clearing Corp. (DTCC) on Wednesday released a two-year industry road map for shortening the settlement cycle for U.S. equities to one business day after the trade is executed, or T+1.

The Reddit GameStop squeeze has cast a spotlight on what’s being called the “antiquated” T+2 standard settlement cycle for most broker-dealer securities transactions.

“It’s time for T+2 to go,” Vlad Tenev, CEO and co-founder of Robinhood Markets, said in a tweet Feb. 2, just days after Robinhood halted buying in GameStop and other stocks.

Robinhood’s decision on Jan. 28 to restrict buying in GameStop and other so-called meme stocks heavily traded by retail investors was driven by regulatory requirements, and the hedge funds Melvin Capital and Citadel Securities played no role in that decision, Tenev told lawmakers on Feb. 18.

“Robinhood Securities put the restrictions in place in an effort to meet increased regulatory deposit requirements [from clearinghouses], not to help hedge funds,” Tenev told members of the House Financial Services Committee.

In its Wednesday paper, “Advancing Together: Leading the Industry to Accelerated Settlement,” DTCC highlights the immediate benefits of moving to a T+1 settlement cycle, including cost savings, reduced market risk and lower margin requirements, as well as the firm’s plans for galvanizing the necessary support for the project across a wide range of market participants.

Former SEC Chairman Clayton Weighs In

Former SEC Chairman Jay Clayton agreed Tuesday at DealBook’s DC Policy event that “time has come for that [trade settlement] period to be shortened. There are costs to that period being two days. … There’s the time value of money, the amount you need to finance those two days of an open position and the uncertainty.”

Clayton added: “There’s no reason with the technology that we have today that that can’t be shortened significantly, whether it goes to what people refer to as T+0 … but it can be shortened significantly.”

The Move to T+1

DTCC — which lacks the regulatory or legal authority to unilaterally change the settlement cycle — stated in its paper that in order to move to T+1, “industry participants must align and agree to shorten the settlement cycle by implementing the necessary operational and business changes, and regulators must be engaged.”

“DTCC continues to take a leadership position to shorten the settlement cycle to T+1, similar to the role it played in 2017 to move to T+2,” the firm said.

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,” DTCC said.

Based on simulations detailed in its paper, DTCC estimates that a move to T+1 could bring a 41% reduction in the volatility component of National Securities Clearing Corp.’s margin.

“The time to settlement equals counterparty risk, which can become elevated during market shocks. It can also lead to the need for higher margin requirements, which are critical to protecting the financial system and investors against a firm default,” said Murray Pozmanter, head of clearing agency services and global business operations at DTCC, in a statement.

“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,” he said.

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said Wednesday that DTCC’s white paper “addresses important issues to enhance our securities settlement processes, which are critical to the continued resiliency of our markets and market operations.”

SIFMA, DTCC and the Investment Company Institute, Bentsen said, “led the effort to shorten the settlement cycle from three to two days in 2017, which required addressing multiple functions and rules.”

As acting SEC chairman in 2017, Michael Piwowar finalized a rule to change the settlement cycle for securities transactions to T+2 from T+3.

“Moving forward on both the integrated settlement model and moving to a T+1 settlement cycle will be a substantial undertaking requiring broad industry actions,” Bensten said.

“As discussions continue around the business and operational impacts on any future changes to shortening settlement times to T+1, we believe it is essential to ensure plans allow for a sufficient amount of time to successfully accomplish further changes, particularly in light of other industry operational obligations such as the Consolidated Audit Trail.

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