Earlier this year, we wrote about the GameStop saga of late 2020/early 2021 and its impact on U.S. capital markets. That drama led to scrutiny of the nation's system for settling and clearing stock trades. Now, the SEC is proposing a rule that could dramatically improve this system.

Currently, stock trades are cleared and settled over a period of up to 2 days ("T+2"). So, when a customer buys (or sells) a stock, they generally won't own the stock (or receive payment for the sale of stock) until almost 2 days later. Since a trade may fall apart during this 2-day settlement period (e.g. if a short seller cannot afford to cover their position in that time), the country’s only clearinghouse (the National Securities Clearing Corporation) insures parties against the risk of a failed trade. To protect itself from this risk exposure, the NSCC requires its member clearing firms to meet margin calls that increase based on trading volatility. It was the NSCC's margin calls that almost broke Robinhood last year and led to trading halts in GameStop and other meme/Reddit stocks. 

Earlier last week, the SEC proposed to reduce the settlement timeframe to 1 day ("T+1"). As SEC and its Chairman have noted, a settlement period of T+1 would reduce the time in which a trade can fail, thereby reducing the NSCC's own risk exposure and, consequently, margin calls imposed by the NSCC. Despite this, the NSCC recently cited its risk exposure as its reason for further increasing the capital requirements that it imposes on member firms.

Although it is unclear how the NSCC's proposal will unfold alongside the SEC's adoption of T+1, a shortened clearing/settlement time frame could genuinely help us avoid a repeat of the GameStop saga.