Yesterday two U.S. SEC commissioners Hester Peirce and Elad Roisman published a statement expressing some disappointment in the SEC’s work agenda. The new Chair of the Securities and Exchange Commission (SEC) Gary Gensler was widely expected to make it a priority to clarify the legal position of digital assets, but the topic was not included on the published agenda for this Spring, although that doesn’t stop it being addressed later. Notably, there are moves afoot for greater inter-agency coordination on the topic.
However, the agenda does include a proposal regarding shortening securities settlement cycles. It states, ‘The Division is considering recommending that the Commission propose rules to amend Exchange Act Rule 15c6-1(a) to shorten the standard settlement cycle.’ That rule states that transactions should not settle later than two days (T+2).
There’s nothing stopping settlement times from being shorter right now, but there’s a tendency to use the maximum time allowed.
Blockchain platforms offer the potential for a shared ledger and faster settlement times, including instant settlement. Longer settlement times allow for a greater degree of netting with an ultimately smaller payment amount. While that may sound like a good thing, it creates significant counterparty risks. This was highlighted earlier this year when Robinhood suddenly had to raise more capital to increase its deposit at the clearing house, owing to a spike in trading in GME stocks.
A shared ledger reduces the high cost of reconciliations, and some of the complex post-trade systems could be far simpler, saving more money. If settlement were instant, it would also reduce the need for some intermediaries.
Given that technology now enables shorter settlement times, what’s holding things back? While the technology might be there, systems are currently set up for T+2 settlement, and only the more innovative are looking for something better. If markets are to move towards instant or same day settlement by default, there will be a need for baby steps.
Last month blockchain firm Paxos announced that Bank of America had joined its instant stock settlement platform alongside existing users Nomura’s Instinet, Credit Suisse and Societe Generale.
Shorter settlement times are already possible elsewhere. For example, the DTCC offers Same-Day Settlement, but only for transactions before 11.30 am.
Changing the rules is not a purely domestic issue as settlement times in many places are also T+2. Another blockchain project for the Hong Kong Exchange HKEX aims to address the difference between settlement times in Hong Kong (T+2) and on the Chinese mainland, where it’s four hours.
While Gensler’s agenda might not be good news for cryptocurrencies, and particularly Ripple with its ongoing SEC litigation, it’s looking good for blockchain.