NYSE, DTCC favor one day to clear stock trades

NYSE vocalizes T+1 support in House Financial Services Committee hearing

Both the NYSE and the Depository Trust & Clearing Corporation (DTCC) are in favor of changing the stock trading settlement time to one day instead of two days, lowering risk for investors and brokerages.

The DTCC, a New York-based company that provides clearing and settlement services for the equity and bond markets, said in a white paper in February that it proposed adopting a one-day settlement of equity trades by 2023. The transaction process for stock trades became the forefront of conversations in February when speculative retail stock traders and short sellers battled each other and pushed up the volume of shares of GameStop ($GME) being traded.

In 2017, the DTCC partnered with the financial industry to shorten the U.S. settlement cycle from three days to two days, said Murray Pozmanter, head of clearing agency services and global business operations at the DTCC.

“This was a complex, coordinated, multi-year effort that marked the most significant change to the U.S. market’s settlement cycle in more than 20 years,” he said.

Support has come from the NYSE, known as the Big Board, in changing the settlement time to “T+1” as Wall Street refers to it.

“NYSE supports the growing consensus to accelerate industry settlement cycles from two days (T+2) to one day (T+1) after the trade,” said Michael Blaugrund, COO of the NYSE, told the House Financial Services Committee on March 17.

While a shorter settlement period can increase the potential for an operational error, the “capital efficiency to be achieved by the industry is likely worth the risk,” he said in the testimony.

“NYSE-listed companies spur economic growth by investing and innovating, leading to a higher quality of life for Americans and global citizens,” Blaugrund said. “Smarter regulation of today’s equity market structure will improve investor confidence, encourage entrepreneurs to access the capital markets and allow the U.S. to extend its leadership in the global markets.”

To move to T+1, the industry has to “align and agree to shorten the settlement cycle by implementing the necessary operational and business changes and regulators must be engaged,” Pozmanter said. The DTCC, which processed $2.3 quadrillion worth of securities transactions in 2020, does not have the regulatory or legal authority to unilaterally change the settlement cycle.

Accelerating the settlement cycle would impact other parts of the structure of the market, including derivatives, securities lending, cash borrowing, foreign exchange and collateral processing, he said.

The DTCC is ready to move to T+1 at the “pace set by the industry and we’re currently focused on gaining strong support this year,” Pozmanter said.

Moving to a one day settlement cycle would bring “immediate, industry-wide benefits, including risk reduction, enhanced market resilience and lower costs for investors,” he said.

Another major advantage is margin relief since each day clearing members are required to post margin with the DTCC to help “manage counterparty default risk in the system and ensure firms and investors are safeguarded,” Pozmanter said.

“Shortened settlement times would reduce those margin requirements, allowing firms to use these financial resources in other ways,” he said. “In fact, DTCC estimates that a move to T+1 could bring a 41% reduction in the volatility component of National Securities Clearing Corporation’s (NSCC) margin.”

The DTC operates three clearing agencies – NSCC, Fixed Income Clearing Corporation (FICC) and the Depository Trust Company (DTC) for clearing and settlement services.

The Nasdaq and CME both declined to comment.

Changing to one day of settlement for equities eliminates a degree of systemic risk, says Steve Sosnick, chief strategist at Interactive Brokers, a Greenwich, Connecticut-based brokerage firm.

“If we are going to T+1 from T+2, I don’t see why not,” he said. “It strikes me as inevitable – the technology has advanced and we can shorten the settlement cycle.”

While changing the operations of trades is not easy, the settlement date for options is already one day, Sosnick said.

“From a trading point of view, it’s pretty transparent whether it is T+1 or T+3,” he said. “When I started, it was T+5.”

Many hedge funds are in favor of faster settlement times. Moving to T+1 is beneficial for both institutional and retail traders, said Peter Borish, president of New York-based Computer Trading Corporation.

“In a world where you’ve got Venmo and pay someone instantaneously and have the development of blockchain and we are heading to do things bolder and faster and better, having a settlement process that’s decades old is the equivalent of Texas not winterizing its pipes and electricity grid,” he said.

The stock market needs to “move in the direction of modernity and not be satisfied with what’s antiquated,” Borish said.

Trades that settle in one day lessen credit risk and increase efficiency, he said.

“Anything that you can do that enhances the plumbing aspect of the settlement is good – the funds flowing in the respective directions for payments or collects more efficiently,” Borish said. “People who have credits – they want to get their money and it’s better protection of the entire system. Even for those that owe money – you should settle quickly. That lessens credit risk.”

Changing the settlement time to one day means investors will gain access to their funds one business day faster than before, said Anthony Denier, CEO of New York-based brokerage firm Webull Financial that uses Dallas-based clearing firm Apex Clearing.

“During this quicker cycle, investments can be made 50% faster than with the current two-day cycle and proceeds from sales can be redeemed by the investor 50% faster as well,” he said. “We are living in the age of instant and investors both big and small want and expect to be able to make decisions faster and not have to wait for antiquated plumbing working on a decades old infrastructure to gain access to either their buying power or cash.”

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