Yahoo Finance Smooth T+1 Transition Cuts Market Default Buffer by $3.1 Billion
(Bloomberg) -- The transition to one-day settlement across US capital markets is going smoothly, reducing the size of a cash buffer against counterparty defaults by about a quarter.
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The National Securities Clearing Corporation’s Clearing Fund — where market players post collateral to cover losses should one side to a trade fail to meet its obligations — has fallen to $9.1 billion, according to the Depository Trust & Clearing Corp. That frees up $3.1 billion when compared with the average value of the fund in the past month under the previous two-day settlement regime.
The smaller safety net is possible because counterparty credit risk has fallen due to the shorter time it takes to complete deals under what’s known in the industry as T+1.
“We are pleased to report a continued, smooth implementation,” said Brian Steele, President of Clearing & Securities Services at DTCC, in a response to emailed questions. “The industry is already seeing its benefits.”
The switch to one-day settlement was intended to reduce risk in the financial system and is being watched closely by market participants for technical glitches or market turbulence amid the change-over. The drop in the clearing fund suggests that one of the main goals appears to have been met.
T+1 Trade-Off
To be sure, it’s not yet clear how much the industry effort to prepare for T+1, as well as the ongoing operational costs of faster settlement, stack up against the margin benefits. A Bloomberg Intelligence study put the cost to investors at around $8 billion each year.
“Just reducing the settlement period to one day doesn’t end the need for clearing margin,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. “Inoculating the market from a broker or major investor from going bust isn’t eliminated — it’s just reduced.”
Momentum for a switch to a system whereby trades settle in one day rather than two picked up after the “meme stock” trading frenzy in early 2021. Back then, retail trading platforms including Robinhood Financial Inc. came under massive stress in part due to the amount of margin they had to post.
The National Securities Clearing Corporation which oversees the clearing fund is a subsidiary of the DTCC — the firm that sits at the heart of the US financial system. The DTCC processed about $3 quadrillion of securities transactions last year.
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