DTCC says T+1 settlement can drop clearing margin volatility by 41%

Rick Steves

This topic gained wide exposure in the aftermath of the ‘meme stocks’ trading frenzy initiated by the r/WallStreetsBets subreddit which successfully gathered an army of retail investors to create a short squeeze in the GameStop (GME) stock.

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The Depository Trust & Clearing Corporation (DTCC) has highlighted the benefits of moving to a T+1 settlement cycle.

A significant number of high-profile names within the industry, headed by nearly disgraced US-based neo broker Robinhood, have called for a shorter settlement cycle for U.S. equities: one business day after the trade is executed (T+1).

This topic gained wide exposure in the aftermath of the ‘meme stocks’ trading frenzy initiated by the r/WallStreetsBets subreddit which successfully gathered an army of retail investors to create a short squeeze in the GameStop (GME) stock.

The extreme volatility and the high deposit figures required by Robinhood’s settlement partner forced the broker to take action, including restricting the trading of the stocks most exposed to the social media trading mania.

DTCC has now released a paper, “Advancing Together: Leading the Industry to Accelerated Settlement”, which states that moving to a T+1 settlement cycle can lead to cost savings, reduced market risk, and lower margin requirements.

In order to make that move, industry participants must agree to shorten the settlement cycle by implementing the necessary operational and business changes, and regulators must be engaged, the firm said.

While the DTCC does not have the regulatory or legal authority to unilaterally change the settlement cycle, the firm will lead the movement as it did in 2017, when the industry changed to T+2.

Murray Pozmanter, Head of Clearing Agency Services and Global Business Operations at DTCC, said: “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. 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.”

DTCC is confident that market participants increasingly favor the move to T+1 to take advantage of the many benefits, especially during times of high volatility and stressed markets. DTCC estimates that a move to T+1 could bring a 41% reduction in the volatility component of NSCC’s margin.

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