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The SEC is looking to overhaul the controversial trade-settlement rule at the center of Robinhood's issues during last year's GameStop mania

Matthew Fox   

The SEC is looking to overhaul the controversial trade-settlement rule at the center of Robinhood's issues during last year's GameStop mania
  • The SEC is looking to overhaul a trade settlement rule that was linked to Robinhood's decision to temporarily restrict meme stock trading.
  • The agency said it voted to propose a rule change that would shorten the trade settlement time of securities from two days to one day.
  • Robinhood CEO Vlad Tenev blamed T+2 settlement as the main cause of last year's temporary restriction of certain volatile stocks.
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The Securities and Exchange Commission has voted in favor of a rule change proposal that influenced Robinhood's decision to temporarily halt the ability to buy shares of GameStop and other volatile meme stocks last year.

The proposed change would shorten the standard transaction settlement cycle for most securities to one business day (T+1) after a transaction from two business days (T+2).

Robinhood CEO Vlad Tenev had previously blamed the T+2 settlement structure as reason why clearinghouse deposit requirements skyrocketed over night amid the January 2021 short-squeeze rally in stocks like GameStop and AMC Entertainment, among others.

Those deposit requirements meant Robinhood had to raise billions of dollars in emergency funding, and temporarily halted the buying in certain securities. Robinhood was not the only brokerage platform to temporarily remove investors' ability to buy certain stocks.

"The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change," Tenev said in a blog post last year that advocated for real time settlements, similar to cryptocurrencies.

"Investors are left waiting for their trades to clear, and the clearing brokers have their proprietary cash locked up, until the settlement is final days after the trade. The clearinghouse deposit requirements are designed to mitigate risk, but last week's wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks," Tenev explained.

It seems the SEC is listening. After shortening the settlement window to two days from three days in 2017, the agency is once again looking to close the time it takes for a stock trade to settle to a single day.

"The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors," the SEC said, with chairman Gary Gensler arguing that the proposed rule change could "drive greater efficiencies" in markets and reduce financial system risk.

"Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses," Gensler explained.

The proposed rule change will now enter a 60-day period for public comment before the agency considers formally adopting the rule.

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