Wall Street has had a central clearing hub, the highly regarded Depository Trust and Clearing Corporation (DTCC), since 1973. The DTCC was created to alleviate the manual paperwork of settling trades and the physical delivery of securities. It has evolved into a technological giant, processing trillions of dollars in securities transaction each day.
Settlement times have improved over the past several years. In 2017, the SEC adopted a two-day (T+2) mandated settlement period, a welcomed change from the three-day (T+3) settlement cycle that had been in place for 22 years. Just six months after the transition to a T+2 settlement, DTCC reported close to 25 percent, or $1.36 billion, worth of savings in capital requirements for trade settlements.
Mitigating Risks with Digital Securities and Blockchain Technology
Yet, the current system is still reliant on collecting data from other intermediaries such as brokers, asset managers, and hedge funds to match and settle trades. Each day, the DTCC processes close to $1.7 trillion of securities trades. Sheer volume in addition to investors’ expectations of increased expediencies make longer transaction cycles not only troublesome but also extremely risky.
Digital Securities, traded on the blockchain, settle almost immediately as the counterparties have a pre-verified and digital ability to complete a trade. This helps prevents having investors wait for trades to clear while funds are stalled at the clearinghouse.
Lessons Learned from the GameStop Short Squeeze
Consider the trading stops imposed during the GameStop (GME) short squeeze. These halts allowed time for DTCC to increase collateral requirements to eliminate the chaos and risk of GME trades failing. Matching digital securities, via digital cash, directly between buyers and sellers eliminates the risk of a central clearing authority disrupting the market by setting higher margin requirements. Settlement of transactions could occur in minutes rather than days.
“The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Vlad Tenev, CEO and Co-Founder of Robinhood, wrote in a blog post on February 2.
Seeing the advantages just 6 months after transitioning from T+3 to T+2 in 2017 gives food for thought to what might be saved and gained with moving to T+1 or even T+0 settlements.
Michael Piwowar, former acting SEC chairman in 2017 and current executive director of the Milken Institute Center for Financial Markets said in a February 5 podcast with the Security Traders Association that shortening the settlement cycle “should be one of the more-high priority things the commission works on.”
Digital Securities and Blockchain Technology Leaders Positioned for Change
As the industry marches forward, the rationale for Digital Securities continues to be clear: faster access to funds through faster settlements, improved liquidity, and market stability. Digital Securities, with AML and KYC built-in, can deliver compliant and pre-confirmed settlements.
In a February 2 tweet, Tenev wrote, “We need to meet this moment with a vision for the future and a focus on the people we serve. We need to come together to deploy our intellectual capital and engineering resources to move to real-time settlement of U.S. equities.”
Forward-thinking leaders at the forefront of these technological advancements are poised and ready to do just that. Pioneers in the trading, Digital Securities, and blockchain space are closely collaborating with existing industry players, regulators, and other key stakeholders. The resulting technological evolution will deliver on reduced settlement times lessening market risk, increased transparency for regulatory oversight, and provide more frictionless trading with benefits such as increasing investors participation in the capital markets by reducing barriers.
It took years to complete the transition from T+3 to T+2. Innovative thinkers leading Digital Securities and blockchain are positioned right now to work with all necessary parties and experts to move towards a settlement cycle that occurs in real time. The change won’t happen overnight, but soon, trading will – and then, in real time.