On Wednesday, Depository Trust & Clearing Corporation (DTCC) issued a white paper highlighting the benefits of a shorter settlement period and a possible two-year path to achieving the proposed change. Trimming the settlement time by a day could cut costs for market participants and significantly lower risks and margin requirements, “especially during times of high volatility and stressed markets,” DTCC said in a press release. DTCC’s subsidiary National Securities Clearing Corporation (NSCC) was Robinhood’s principal clearinghouse during the GameStop trading frenzy in January. Currently, when a stock is bought or sold, it takes the trade date plus two days, or T+2, for a clearinghouse to settle that trade. To cover risk that the trade may not settle during that time or the buyer won’t be able to pay by the settlement date, brokers are required to make deposits known as margin or collateral with the clearinghouse. The amount is determined by whether the broker’s customers have more buy orders than sell orders and whether the security they’re trading in is highly volatile. Normally, it isn’t a problem for brokers to make these collateral deposits. But last month, when individual GameStop investors banded together to try to force hedge funds out of their short positions, all sorts of chaos and extreme volatility ensued that forced clearinghouses to raise collateral requirements. In turn, brokers like Robinhood had to restrict some trading on their platforms. In a blog post in late January, Robinhood said “the required amount we had to deposit with the clearinghouse was so large—with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements—that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements.” Its CEO Tenev went on to declare a few days later, “It’s time for T+2 to go.” Although DTCC isn’t going as far as Robinhood’s call for real-time settlement, it has suggested trimming the settlement time by a day to T+1. DTCC’s plan, which would need extensive industry support, includes building and testing a prototype system this year, integrating it next year, and making an official move to T+1 in 2023. DTCC estimates T+1 could drop NSCC’s margin requirements by 41%.
