The GameStop Congress would be without antiquated two-day accounting times for stocks … [+]
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In his testimony before the House Financial Services Committee on the GameStop trading frenzy, Robinhood chief Vlad Tenev called for an industry-wide change in the trade settlement process. The hedge fund billionaire Ken Griffith repeated Tenev’s plea for “shortened settlement cycles and transparent capital models”. The congressional hearing centered on the events of the last week of January when Robinhood ceased trading GameStop and a few other stocks after a crowd of retail investors drove up the price of these stocks to “squeeze the hedge on Wall Street.” ” Medium. However, Tenev and Griffith calls for an overhaul of the securities industry’s settlement system could open up the opportunity for new blockchain-based improvements that are already in the works.
Tenev called for the need to move from the current two-day trade settlement period known as T + 2 to real-time trade settlement. He claimed that “real-time settlement would have allowed Robinhood Securities to better respond to periods of increased market volatility without restricting purchases of securities,” which essentially shifted the blame for service disruptions to an often overlooked trade settlement mechanism. Citadel CEO Ken Griffin also advocated a shortened trading cycle, albeit a less extreme one-day model, in his testimonial.
The settlement cycle T + 2, short for trade plus two business days, was adopted by the SEC in March 2017 as a revision of the previous three-day model. It just means that the trade is considered final two working days after the day the order is executed in the market.
“There’s no reason the greatest financial system the world has ever seen can’t do business in real time. This would greatly reduce the risk of such processing, Tenev said. The requirements for clearing house deposits are intended to reduce the risk. However, last week’s wildlife market activity has shown that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that create new risks. ”
Tenev’s thesis largely echoes his Feb. 2 blog post, boldly titled “It’s Time for Real-Time Billing.”
In fact, blockchain technology has already opened the gates not only for real-time processing, but above all for the world in which merchants would not have to rely on intermediaries like DTCC. PayPal’s crypto partner, Paxos, a blockchain-based fintech company based in New York, is at the forefront of this innovation. Last February, the company launched the Paxos Settlement Service, which is the breakthrough in the settlement of publicly traded US equities without a central counterparty. The service allows attendees to choose virtually any cycle, including same day billing. His clients include Credit Suisse, Nomura Instinet and one of the largest banks in France, Societe Generale. The service has already completed 15,000 deals valued at approximately $ 75 million.
Charles Cascarilla, CEO and Co-Founder of Paxos, believes decentralization is the future of securities settlement. “Decentralized systems are simply more resilient. They use less capital, they cost less. And that is exactly what we offer – a processing system with extended functions. We’re not telling the market exactly what to do. “
Someone who is certainly not afraid to openly criticize the current system is Overstock’s former CEO Patrick Byrne, who described the separation of trading and settlement as an “original sin”. By uniting the two through real-time processing, “you eliminate systemic risk and all kinds of nonsense. They also make the market completely transparent to regulators, ”Byrne said in a 2019 interview with Forbes. Earlier this year, Overstock’s blockchain technology company tZERO launched a platform for trading security tokens. As the name suggests, the company sees its mission in making the capital markets more efficient and transparent.
The opportunity that blockchain technology offers for financial markets is recognized worldwide.
Australia’s main stock exchange, ASX, has developed a blockchain-based post-trade clearing and settlement system that will replace the quarter-century-old platform called the Clearing House Electronic Subregister System (CHESS). ASX partners include Digital Asset, a New York-based technology company that is behind the open source smart contract language DAML, and software company VMware, known for developing the technology behind Facebook’s cryptocurrency Diem. The ASX representative was not immediately available to comment.
Even outside of the blockchain community, the Depository Trust & Clearing Corporation (DTCC), which handles the vast majority of US securities transactions, is the parent company of the National Securities Clearing Corporation (NSCC), the clearing house at the center of the GameStop The Robinhood Story their support for accelerating the current settlement cycle.
In a post published February 18, DTCC chief executive officer and general manager of equity clearing and DTC settlement services, Michael McClain, elaborated on the issue. “The reality is that we are already able to clear and settle T + 1, or even the same day with existing technology, and in fact we clear a number of T + 1 trades every day. In our discussions with the industry, it seems that many companies are ready to revise their processes in order to speed up the process. They recognize that this is in their best interest: reduced settlement times reduce market risk and margin requirements, so companies can use these resources in other ways. “
If there is demand and technological capability then why are we still on T + 2?
The simple answer is, such a change would require regulatory engagement. The more complicated argument is that under the current system, the NSCC “net” or “reduce” the total amount of cash and securities that have to go back and forth throughout the day. This eliminates a significant operational and market risk, said Michael McClain, chief executive officer of DTCC. In a real-time settlement scenario, netting is not possible, which means that trillions of dollars in cash and securities flow continuously through the financial system throughout the trading day, causing massive market and capital inefficiencies, increasing credit and operational risks. and rising costs between trading parties, potentially undermining the stability of the markets. “
Even with a blockchain-enabled, faster settlement, brokers are reluctant to take advantage of the opportunity. Cascarilla, CEO of Paxos, attributes this to the potential difficulty of keeping trades in sync with different time frames. He hopes, however, that at some point the markets will warm up to an immediate trade settlement: “That releases capital. The faster you settle down, the less the chance someone will fail. The less risk you have, the less capital you have to hold. “