Clearinghouse Urges Faster Trade Settlement Amid GameStop Scrutiny


The clearinghouse operator whose $3 billion margin call spurred Robinhood Markets Inc. to limit trading in

GameStop Corp.


GME -2.24%

is urging an overhaul of the stock market’s plumbing that could reduce the risk of such a scenario repeating.

The Depository Trust & Clearing Corp. said in a report on Wednesday that Wall Street should speed up the time it takes to settle securities trades to one day from two, and it called for a broad effort by the industry and regulators to achieve that goal by 2023.

In an interview, a DTCC executive said the report was in the works months before the dramatic Reddit-fueled rally in GameStop. Still, the report’s release comes as the DTCC faces an unusual degree of attention because of its role in the GameStop frenzy.

Last week, lawmakers from the House Financial Services Committee grilled Robinhood Chief Executive

Vlad Tenev

over his firm’s controversial decision to restrict trading in GameStop on Jan. 28. The trading limits came at the peak of the stock’s rally, infuriating many Robinhood customers, and they punctured the huge speculative run-up in GameStop.

Executives of Robinhood and other companies testified before Congress Thursday after January’s trading frenzy involving GameStop and other securities raised concerns about the integrity of the U.S. stock market and the rules that govern it. Photo illustration: Ang Li

Mr. Tenev said Robinhood’s hand was forced by the DTCC’s huge margin call, and he called for a shake-up of the clearinghouse’s processes to reduce the burdens that they place on brokers.

Owned by a financial-industry consortium, the DTCC is invisible to most investors, even though it processed a mind-boggling $1.77 trillion of securities trades on an average day last year. After every stock trade, it ensures that shares are delivered to the buyer and cash is delivered to the seller. That process takes two business days and is called T+2 settlement in industry jargon.

To protect against the risk that a buyer or seller will default during those two days, a DTCC subsidiary known as the National Securities Clearing Corp. maintains a multibillion-dollar fund to be tapped in case of such a failure. The NSCC fund is maintained by deposits from brokerages including units of many Wall Street banks as well as some online brokerages, such as

Charles Schwab Corp.

and Robinhood.

When trading volumes rise or markets become more volatile, the DTCC can demand additional deposits from brokerages—which is what happened with Robinhood on Jan. 28. Unable to come up with $3 billion immediately, Robinhood limited buying in GameStop. That made the Menlo Park, Calif.-based brokerage firm less risky according to NSCC formulas and reduced the size of the margin call. Some of Robinhood’s rivals also limited trading in GameStop.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

OTHER BROKERS’

COLLATERAL

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

Investors buy and sell stock through their respective brokers, in this example Robinhood and Charles Schwab.

The Depository Trust & Clearing Corp. (DTCC) ensures that the seller is paid and the buyer receives the shares, a process that takes two business days.

National Securities

Clearing Corp., a

DTCC subsidiary,

maintains a fund

to protect against

defaults during that

two-day period.

The NSCC’s clearing fund is maintained by member

brokers such as Robinhood, Schwab and units of

Wall Street banks. As a member’s risk exposure

grows, the NSCC may demand that it deposit more

money in the fund.

In Wednesday’s report, the DTCC said shortening the settlement circle by one day would lead to significant savings among brokerages since they wouldn’t need to post as much margin. The largest component of brokers’ NSCC margin requirements, which is determined by a measure of volatility, would drop by 41%, the report found.

The DTCC wouldn’t be able to unilaterally move to T+1 settlement. Such a shift would need the blessing of the Securities and Exchange Commission, and hundreds of firms would need to update their systems and take part in coordinated industry tests to ensure a smooth transition.

“It’s a fairly large undertaking,” Murray Pozmanter, the DTCC’s head of clearing agency services and global business operations, said in an interview.

But the DTCC stopped short of embracing Robinhood’s call for real-time settlement—or instant processing of trades. If securities trades were settled in real-time, investors would be able to sell stocks and immediately access the proceeds of the sale, rather than having to wait. Mr. Tenev has voiced support for real-time settlement, as have some players from the cryptocurrency markets, where blockchain technology allows transactions to be settled instantly.

The DTCC’s report said real-time settlement would have a variety of major drawbacks. For instance, all stock trades would need to be fully funded at the time the investor executed them. Effectively, this means that margin trading—using borrowed money to buy shares—wouldn’t be possible in its current form. The DTCC also warned that real-time settlement would require a much more complex re-engineering of financial firms’ systems.

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“T+1 is a welcome steppingstone to real-time settlement,” Mr. Tenev said in a statement. “We look forward to working with lawmakers, regulators and the industry to make this a reality.”

The last big change to the U.S. stock-settlement process was in 2017, when Wall Street moved to T+2 from T+3 settlement. Before that, the last shortening of the process was in 1995, when the industry moved to T+3 from T+5 settlement.

Mr. Pozmanter said industry support for further accelerating the settlement process grew after the coronavirus pandemic, when a surge in volatility and trading volumes resulted in brokers being forced to post more margin at the NSCC.

In 2018 and 2019, the size of the NSCC clearing fund—where those deposits are pooled together—averaged around $7 billion. Last year, that level rose to $13 billion. According to the DTCC, the size of the fund hit a record $36.4 billion in December when

Tesla Inc.

was added to the S&P 500, resulting in enormous trading volumes as index funds snapped up shares of the electric-car maker.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

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