Authorities deny Robinhood’s movement for real time settlement

Rick Steves

Robinhood’s infrastructure seems unable to deal with the T+2 settlement cycle in times of extreme volatility. The United States are in the process of moving toward T+1 for its risk mitigation, but the Robinhood-backed real-time settlement remains a mirage.

The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) have sent a joint letter to the SEC in regard to the industry’s efforts to shorten the securities settlement cycle to T+1.

The debate over the T-1 settlement cycle rose to prominence in the wake of the trading disruptions earlier this year, with neobroker Robinhood and others alike taking the blame for restricting the trading of certain instruments, namely Gamestop (GME) shares, as the WallStreetBets subreddit made a dent in short-sellers’ business.

Removing 24 hours from the current settlement cycle comes with obstacles and challenges, but the result of a T+1 settlement cycle will mitigate risk well beyond what was achieved under T+2, the entities stated, adding that settlement efficiencies and better use of capital in periods of high volatility will make the move worthwhile.

The issues involved in shortening the settlement cycle will need fundamental behavioral, technological, and regulatory changes, but these will not prevent an industry move to T+1.

Automation and increased synergies between counterparties will allow for more resilient processes. As such, when the changes identified are implemented, T+1 will deliver increased market efficiency and risk mitigation compared to the benefits achieved under T+2.

SIFMA, DTCC, ICI are developing solutions together with experts from the buy-side, sell-side, custodians, vendors, and clearinghouses, in order to address the necessary technological, regulatory, and behavioral changes.

“Shortening the settlement cycle is a significant undertaking and requires participation across many functions of the industry. We believe shortening the settlement cycle to T+1 will increase the overall efficiency of the securities markets, mitigate risk, create better use of capital, and promote financial stability, provided the appropriate balance is achieved between increasing efficiencies and mitigating risk”, the letter concluded.

Commenting on the letter, Meritsoft’s Head of Regulation Daniel Carpenter said “the groups are right to suggest that greater automation is needed to better identify the causes of settlement failure, but ultimately this is needed beyond just equities and needs to cover all transactions that settle T+2.

“Any challenges related to identifying why and how trades fail can be addressed by centralising the fails data in a single repository, a “single pane”, then applying the likes of AI to examine the likelihood and root cause of settlement fails, and the associated sources of the most costly and frequent fails. If moving to T+1 also drives greater automation of the trade settlement fails process, organisations and markets will definitely benefit from these technical improvements.”

In February, the DTCC argued that T+1 settlement can drop clearing margin volatility by 41%.

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What about Robinhood’s T+0 settlement proposal?

The mounting pressure on Robinhood has led the broker to lead the movement for real-time settlement, but this still seems a mirage in the face of the present letter to the SEC.

“As part of our analysis, we have also reviewed the issues involved with moving to an end of day or T+0 settlement. We have found that same-day settlement is more complex than simply removing an additional day from the cycle and would require re-engineering how securities trade and settle”, the letter stated.

“This re-engineering would necessitate a redesign of areas such as global settlements, FX, margin investing, and securities lending to meet regulatory and contractual requirements in less than 12 hours, where today it takes more than 24; potentially requiring retail investors to pre-fund accounts; potentially creating a competitive burden for smaller firms and vendors due to the resources believed necessary to complete a move to T+0; and (iv) could require industry stakeholders—including the Federal Reserve’s payment systems—to maintain services much longer during the day, which could increase the potential for failure.

“A requirement that all activity be completed in one business day of perhaps 12 hours or less would also impact the ability to complete non-automated activity, which could expand the rate of trade fails in the system, leading to increased risk. Recognizing these challenges, the industry has and will continue to investigate ways to further shorten settlement times through cost-benefit analysis, considering risk mitigation, investor benefits and costs, and operational resiliency”.

In February, Robinhood’s CEO Vlad Tenev and others called the trading industry, Congress, regulators, and other stakeholders “to come together to deploy our intellectual capital and engineering resources to move to real-time settlement of U.S. equities”.

“Accomplishing this won’t be without its well-documented challenges, but it is the right thing to do and Robinhood is eager to drive this critical effort on behalf of all investors. Technology is the answer, not the oft-cited impediment. We believe it is important for all relevant stakeholders to convene in the near term to discuss the urgency and necessity of this issue.”

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