Instant settlement may not be rewarding for everyone
When it comes to settlement times, maybe not everyone in the market feels the need for the fastest speed.
The brief trading restrictions that occurred in January for ‘meme’ stocks like GameStop continue to draw attention to the detail of how quickly stock trading is taking hold in the United States.
Robinhood Markets and others argued that instant or real-time settlement, rather than taking a few days like the current system for stocks, would protect clients by not hitting brokers with huge or sudden cash needs. in clearing houses. Some lawmakers, including at a Senate hearing last week, said faster resolution should be a priority.
However, other players in the financial complex may have complicated feelings on the matter. Like Robinhood, large, established companies could also free up cash and avoid the risk of settlement failure with instant settlement, because in theory there would be no need for locked-in funds to insure against failed settlement. a commercial part to deliver cash or shares. But such a move also has costs.
One thing about deferred settlement that is useful for banks and brokers is what is called various flow clearing. Companies have day traders as clients, but also retirement accounts, fund managers, etc. These transactions can all be offset against each other for a much lower final settlement bill in the current system. According to the Depository Trust & Clearing Corp., of the more than $ 1.7 trillion of U.S. stock trades going through the system on a typical trading day in 2020, at the end of the day, the typical total value settled by the major stock clearinghouse was less than $ 40 billion.
Size could work against big companies if instead those trillions were to change hands throughout the day as deals were agreed. This would require upgrades to payments and other systems, such as the business process for lending and borrowing shares, which is often part of how transactions are settled. Securities financing is a key part of market making and also generates a lot of revenue for lenders, nearly $ 8 billion globally in 2020 by one measure, according to DataLend.
Some advocate common ground for now. DTCC has supported moving from the current system, which is a transaction date plus two days, or T + 2, to a faster day, or T + 1. DTCC says this could reduce the volatility portion of margin fees by 41%. Michael Piwowar, former commissioner of the Securities and Exchange Commission and now executive director of the Milken Institute Center for Financial Markets, told the Senate last week that regulators should consider moving to T + 1, but that “real-time regulation is just a bridge. too far at this point.
At present, large companies in particular may not feel a great urgency. Many banks and brokers are currently inundated with cash with virtually nowhere to go, so having to park it in a clearinghouse can be a relatively light burden at this time. Meanwhile, tech budgets are already facing expensive upgrades to consumer software, regulatory compliance systems, and more. “Investing heavily in operations technology would be necessary for faster settlement,” said Virginia O’Shea, industry consultant and founder of Firebrand Research, but “it’s not a revenue-generating part of the business. For many financial institutions.
Some will still argue that today’s spending is justified to move towards the ultimate goal of a largely instantaneous financial system. Technology has evolved to potentially make such an instant exchange possible, perhaps using forms of blockchain. But what is possible is not always probable.
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Appeared in the print edition of March 17, 2021 under the title “Instant Settlement May Not Be Rewarding For All”.