Stock market background design

Further shrinking the securities settlement cycle in the U.S. would be a positive for industry firms and the financial system overall, says Moody’s Investors Service.

In a new report, the rating agency said that during Congressional hearings last week, U.S. clearing firm Depository Trust & Clearing Corp. (DTCC) indicated the U.S. financial services industry is increasingly prepared to move from a T+2 to T+1 cash equity settlement period.

Reducing the settlement cycle would reduce counterparty risks for clearing firms and the “broader financial services industry,” Moody’s said.

At the same hearings, which stemmed from lawmakers’ interest in the recent market volatility due to an apparent short squeeze powered by retail investors, several brokerage firm CEOs also spoke in favour of reducing the settlement cycle, the report noted.

For instance, Vlad Tenev, CEO of Robinhood Markets, Inc., said a shorter cycle “would have lessened the problems” it faced amid heightened trading volumes, which caused it to temporarily halt trading in certain stocks.

Moody’s said a shorter cycle would also lower firms’ margin requirements, reducing liquidity risk and contributing to “the safety and soundness of the overall financial system.”

It would also benefit retail investors by reducing the risk of broker default during the settlement period.

While there’s support for reducing the settlement cycle, Moody’s also noted this is “a complex undertaking for a clearing house and its members that requires extensive planning, systems development and integration, and has extensive operational challenges.”