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Financial Services Update

Banks and brokers told US regulators that there is no insurmountable obstacle to halve the two-day window for completing stock transactions. This is a market practice that has been censored after this year’s meme trading boom.

An industry-wide initiative to explore practicality Accelerating The time required to settle millions of stock transactions every day tells the US Securities and Exchange Commission that there will be “obstacles and challenges,” but this shift will reduce the overall risk of the US stock market.

After retail brokerage firm Robinhood restricted customers from buying certain stocks (such as GameStop and AMC) in January, politicians and regulators have begun to pay attention to this practice, during which buyers and sellers coordinate transactions and legally transfer assets. Citadel Securities and Virtu Financial, market makers that facilitated 51 trillion US stock market transactions, also called for review.

The initiative is promoted by Sifma, which represents banks, ICI, which represents investment managers, and DTCC, which operates major U.S. stock clearing houses. The transition to a settlement period called T+1 will require SEC committee members to vote on approval of the rule change. Sifma, ICI, and DTCC requested to meet with SEC staff and brief them on their findings.

“We have found that some of the issues involved in shortening the settlement cycle require fundamental behavioral, technical and regulatory changes; however, we are happy to report that these issues will not prevent the industry from turning to T+1,” it sent to the United States on August 13 Said in a letter from Gary Gensler, chairman of the Securities and Exchange Commission, and four commissioners of the agency. The letter was published by Sifma on Tuesday.

Shortening the settlement period will reduce funds-called margin payment-brokers need to Clearing house To make up for potential losses during transaction settlement.

The mega trading activity surrounding GameStop earlier this year broke the record of the National Securities Clearing Corporation, the DTCC stock clearing house. January 28 was one of the highest trading days in its history. The 474 million transactions processed by the NSCC were more than 100 million more than the peak of the coronavirus market turmoil in March 2020. The clearing house’s industry margin requirements rose from US$26 billion to US$33.5 billion.

Among the areas identified as “challenges” by Sifma, DTCC, and ICI include practices related to determining the cause of settlement failure, delivering investor documents, securities lending, transferring assets worldwide, and creating and redeeming exchange-traded funds. The organization found that some problems can be solved by more automation of the back-end system, while other problems require changes in behavior.

However, it rejected the call for settlement of the transaction on the same day as the transaction execution, as this required a redesign of the system for trading and settlement of securities. It added that this means investors must fund all transactions in advance, and related services such as the Federal Reserve’s payment system must be available for longer, “this may increase the probability of failure.”

The goal of DTCC, Sifma and ICI is to complete their analysis by the end of September.

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