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I don't buy the suggestion that DTCC deposit requirements left Robinhood and other brokers unable to facilitate all transactions. It is a backwards rationalizat

I don't buy the suggestion that DTCC deposit requirements left Robinhood and other brokers unable to facilitate all transactions. It is a backwards rationalization, trying to put technical reasons to a fear-driven decision. First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds. If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade. Secondly, many brokerages only blocked options transactions. These don't clear through DTCC at all. They clear through OCC and net purchases of options actually capitalize the clearinghouse and can in some cases actually be advantageous to the broker by getting their accounts long premium (if the broker is net short premium, the OCC charges them more). It's more likely that the brokerages didn't have enough staff to reconcile the trades, or that Robinhood's fake margin accounts (Robinhood Instant) left them in a position where they had to choose between telling people that they have to wait for funds to settle, or limiting trades. Any brokerage that limits trading in an asset for which the exchanges and clearinghouses are functional is harming its customers by preventing their market access. Weird hand-wavey apologetics about the DTCC or OCC don't explain why the retail brokerages had to limit trading in cash accounts.

stu2b50 6y ago
Brokers are not allowed to touch client money to submit the deposit. That the purchases are settled cash on the user's account makes no difference, because none of that money Robinhood could use to clear the deposit.
- zaroth 6y ago
  But it’s not client money the second the trade executes?
  - tptacek 6y ago
    At what point does the client's money belong to Robinhood? You're not buying stocks from Robinhood.
    - zaroth 6y ago
      Robinhood is on the hook to do their part in settling the trade and delivering the shares to their client and cash to the seller. Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase. I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry. But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that. I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
      - tptacek 6y ago
        I think the margin stuff is pretty much a red herring. The customer's cash doesn't belong to Robinhood. Robinhood is required to provide its own cash as collateral, because it's ensuring the market against itself. Those collateral rules aren't just for margin purchases. Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
        NovemberWhiskey 6y ago
        This is right; in fact the article says "this is not about margin accounts".
        zaroth 6y ago
        I think--like most outsiders trying to have a technical discussion--you can peel back the onion only so many layers. A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
  - stu2b50 6y ago
    It's client money until it settles.
    - zaroth 6y ago
      Assuming this is true, what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
      - stu2b50 6y ago
        The Broker isn't allowed to borrow against client money either - it's client money, partitioned off from the broker's fungible funds, and not the Broker's to offer as collateral. But debt is the natural answer, and Robinhood did get as much in loans as they can[0]. [0]https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
      - gruez 6y ago
        >what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. and that's exactly what they did. On thursday night they secured a $1B loan.
        sokoloff 6y ago
        That's not exactly what they did. What they did was to get $1B in funding against other assets that are actually theirs. Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
  - toast0 6y ago
    It's client money until the trade settles at T+2, at which point it's the counterparty's money. It's never Robinhood's money (unless they're the counterparty, but I don't believe they do propriatary trading)
- totalZero 6y ago
  If you think brokers are not allowed to use a customer funds to settle that customer's transactions, I've got news for you buddy.
  - stu2b50 6y ago
    Of course they are allowed to use it to _settle_, but not for the clearing fund deposit.
alisonkisk 6y ago
I read that "cash accounts" don't really exist from the clearing perspective, because the broker can't counts cash accounts as part of its collateral. Cash accounts (which is just a margin account with 100% collateral in cash) protect the broken against client default, but don't protect the clearinghouse from broker default. It's an opaque API wrapper, in programmer language.
- totalZero 6y ago
  For cash accounts, the broker already has settled cash when the trade is made, and can immediately post that cash to the clearinghouse.
  - sokoloff 6y ago
    The broker cannot use customer funds to post a broker obligation.
    - totalZero 6y ago
      The broker would be using customer funds to clear a customer trade.
      - sokoloff 6y ago
        Of course they'd do that when it comes time to actually fund the trade. That's not what Robinhood's limitation was and not the subject of this article. The funds in question required to be posted to DTCC are a broker responsibility to serve as mutual insurance wherein the risk of a broker failing are shared among the brokers in some proportion to the volume and risk that they represent. These must be posted using broker funds (obviously, you can't protect customers from things outside their control by pledging customer money to be used in the event of a default).
        totalZero 6y ago
        How, pray tell, do you think a broker actually funds an unsettled obligation on a cash-secured customer trade?
deleted 6y ago
[deleted]
MrMan 6y ago
Comments that start with saying "I don't buy" the real-world non-simple explanation, even in the face of mountains of real world evidence, are not in the spirit of any site that pretends to be some kind of better place. Conspiracy fantasies should be moderated down by the administrators. "Wide eyed curiosity" comes second to pragmatism, realism, lack of narcissism and entitlement.
- vamos_davai 6y ago
  There's no difference between conspiracy and hypothesis.
  - cromka 6y ago
    You mean "conspiracy theory" and "hypothesis". And yes, there fundamentally is a difference between theory and hypothesis: https://www.merriam-webster.com/words-at-play/difference-between-hypothesis-and-theory-usage https://www.merriam-webster.com/words-at-play/difference-bet...
    - vlovich123 6y ago
      > Outside of scientific reasoning, "theory" and "hypothesis" are often used interchangeably, and "theory' can unfortunately be interpreted to mean "less sound" or "lightly speculated."
- PragmaticPulp 6y ago
  It’s scary how much conspiratorial thinking is gaining traction in the GameStop story. Despite the narratives about people buying GameStop for altruistic purposes or for sticking it to Wall Street, it’s obvious that most people bought because they were told the trade couldn’t fail and this was an easy way to double their money (or more). When it doesn’t work out, I’m worried that people will reach for more conspiracy theories instead of realizing that the latest GME buyers were always guaranteed losses.
  - TuringNYC 6y ago
PragmaticPulp 6y ago
> First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds. RobinHood’s UX was built around the concept of hiding margin details from clients. All Robinhood accounts are margin accounts by default. Inbound funds transfers give people margin buying abilities before the trades arrive. Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? This is an unprecedented event and it happened very, very fast. Robinhood likely only had a few options to roll out immediately. Let’s not pretend they could have reworked their trading platform, tested and deployed the changes, and implemented the action in a matter of hours.
- zaroth 6y ago
  > Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? Yes, this is impossible to believe. Different stocks already have different margin requirements. Turning off margin trading for specific stocks is a fundamental system requirement.
  - tptacek 6y ago
    I think all these margin discussions are a red herring. The clearinghouse requirements are based on the total number of shares sold, not the total sold on margin. As I understand it, clearing is mutual insurance against a disaster at the brokerage, not against customers randomly defaulting.
- TuringNYC 6y ago
  If this was the case, why not just provide an honest explanation rather than “we’re restricting this for your own good”
  - dash2 6y ago
    No company likes to say "our clearinghouse doesn't trust us to settle our accounts". It makes them look unstable... as they probably are. I bet you, RH has been handing out margin the same way mortgage sellers handed out loans in 2007.
paulgb 6y ago
> If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade. If they have two days to pay, DTCC is taking on some counterparty risk. Isn't that reason enough for DTCC to increase the deposit requirements when they see risk increasing? (Not a rhetorical question, you seem to know what you're talking about so I am curious what the answer is.)
- totalZero 6y ago
  The purpose of a clearinghouse is to manage that counterparty risk prior to settlement, and ensure that settlement occurs smoothly. Some clearinghouses like OCC carry counterparty risk throughout the life of a trade. The counterparty in question is the clearing member, ie Robinhood. If the trade is fully cash-secured then there is no risk that Robinhood will go under because it has 100% of the cash required to make good on the trade (assuming they still make enough from PFOF to cover their operating costs for a couple of days.) And for existing margin accounts, they just have to continue the practice of aggressively closing positions that fall below maintenance margin.
  - tptacek 6y ago
    The NSCC formulas for this (I assume these are the relevant ones and if not that they're representative) are published. You can just go read them. I don't see where they say "if trades are made with customer cash and not on margin you don't have to account for them in the equity group collateral requirement". That also wouldn't make much sense; the clearinghouse protects participating firms from each other, not just from their customers.
    - totalZero 6y ago
      Actually, the Clearing Fund Formula accounts for Margin Requirement Differential, so margin is indeed a component of the amount posted. More importantly, cash requirement effectively reduces the amount of leverage that customers are able to use, and that means (A) no additional firm capital needs to be lent for purchases of GME or whatever other stock, and (B) margin-account customers trade less on a given amount of their own capital. Are you suggesting that Robinhood would be required by Procedure XV to post more than $1 for every $1 of GME stock that a customer buys in a cash account?
sokoloff 6y ago
> your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade I think you’re thinking about it wrong. All brokers contribute to this posted collateral and those funds, collectively, serve as a fund of mutual insurance in the event of a failure or near-failure of a participant. These are not "partial payment of customer trades, with the rest to come later". In order to prevent customers from being affected by that near-failure, the clearinghouse first goes to that struggling broker and then to this mutual insurance fund. That is the reason why this must be funded with broker funds rather than customer funds, so the fact that you 100% paid for your shares doesn’t mean that the broker has “all of the funds” required because they can’t use your money to post this. (Otherwise “to protect customers” is not accomplished.)
dannyw 6y ago
DTCC raised collateral requirements for GME from 2% to 100%.
- spurgu 6y ago
  Source?
  - noughtme 6y ago
    While DTCC did not publicly confirm the amount, it did confirm that capital requirements were raised January 28. Given that numerous participants have publicly stated it was to 100%, that seems likely. https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-and-how-did-it-stop-gamestop-mania-quicktake https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-an...
    - deleted 6y ago
      [deleted]
    - erichocean 6y ago
      But but but that's not market manipulation, that's just one company doing a normal thing in the normal course of business… I'm sure it had nothing to do with GME.
      - threedots 6y ago
        It had lots to do with GME in that GME was the source of the risk (because of its through the roof volatility) that the DTCC was protecting against. But if your implication is that the DTCC has a dog in that fight you are way off base - they exist several layers below hedge funds in the trading stack and have nothing to do with each other, in fact I'd be willing to bet Gabe Plotkin couldn't even tell you what DTCC stands for.
- tptacek 6y ago
  Is that documented somewhere? I absolutely believe it, I'm just curious.

stu2b50 6y ago

Brokers are not allowed to touch client money to submit the deposit. That the purchases are settled cash on the user's account makes no difference, because none of that money Robinhood could use to clear the deposit.

zaroth 6y ago
But it’s not client money the second the trade executes?
- tptacek 6y ago
  At what point does the client's money belong to Robinhood? You're not buying stocks from Robinhood.
  - zaroth 6y ago
    Robinhood is on the hook to do their part in settling the trade and delivering the shares to their client and cash to the seller. Obviously once funds are used to execute a trade, they are no longer client funds. It seems obvious that the cash at that moment would be held separately as the shares settle. That's discretely identifiable hard cash that is fully funding that specific share purchase. I completely grok the various ways that cash that "looks like" it's in the account might not be; deposits that haven't actually cleared, prior trades that haven't actually settled.. and in those cases the brokerage is actually extending credit to their client, and that credit can run dry. But if I have hard cash and a trade executes, that cash is gone from the account. The counterparty risk at that point is the shares not being delivered, which seems to me like it would be collateral that the seller needs to be posting to DTCC (likely DTC already holds the shares). The buyer needs to show they have the hard cash, and they can easily do that. I guess I can't get around the fact that if the purchase is fully funded with hard cash that's in the account, that is cleared cash that can be sent off to DTCC/NSCC during the end-of-day settlement via FedWire.
    - tptacek 6y ago
      I think the margin stuff is pretty much a red herring. The customer's cash doesn't belong to Robinhood. Robinhood is required to provide its own cash as collateral, because it's ensuring the market against itself. Those collateral rules aren't just for margin purchases. Would love to be corrected here if I'm wrong, but I'm not sure margin has really much to do with what's going on, and it seems to be most of what we're talking about.
      - NovemberWhiskey 6y ago
        This is right; in fact the article says "this is not about margin accounts".
      - zaroth 6y ago
        I think--like most outsiders trying to have a technical discussion--you can peel back the onion only so many layers. A true insider would alternatively laugh or cringe at our crude analogies and simplifications of what's really happening inside the factory.
- stu2b50 6y ago
  It's client money until it settles.
  - zaroth 6y ago
    Assuming this is true, what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. Suppose a 3% interest rate (which seems high for guaranteed cleared funds), $1 billion for 24 hours is $82,000.
    - stu2b50 6y ago
      The Broker isn't allowed to borrow against client money either - it's client money, partitioned off from the broker's fungible funds, and not the Broker's to offer as collateral. But debt is the natural answer, and Robinhood did get as much in loans as they can[0]. [0]https://finance.yahoo.com/news/robinhood-said-draw-credit-lines-214509076.html https://finance.yahoo.com/news/robinhood-said-draw-credit-li...
    - gruez 6y ago
      >what the brokerage needs to do is take a loan against the settled cash they are already holding in escrow for ~24 hours. and that's exactly what they did. On thursday night they secured a $1B loan.
      - sokoloff 6y ago
        That's not exactly what they did. What they did was to get $1B in funding against other assets that are actually theirs. Just because your house is worth $1M doesn't mean that I (being "not you") can go get a mortgage pledging your house as collateral.
- toast0 6y ago
  It's client money until the trade settles at T+2, at which point it's the counterparty's money. It's never Robinhood's money (unless they're the counterparty, but I don't believe they do propriatary trading)
totalZero 6y ago
If you think brokers are not allowed to use a customer funds to settle that customer's transactions, I've got news for you buddy.
- stu2b50 6y ago
  Of course they are allowed to use it to _settle_, but not for the clearing fund deposit.

alisonkisk 6y ago

I read that "cash accounts" don't really exist from the clearing perspective, because the broker can't counts cash accounts as part of its collateral. Cash accounts (which is just a margin account with 100% collateral in cash) protect the broken against client default, but don't protect the clearinghouse from broker default. It's an opaque API wrapper, in programmer language.

totalZero 6y ago
For cash accounts, the broker already has settled cash when the trade is made, and can immediately post that cash to the clearinghouse.
- sokoloff 6y ago
  The broker cannot use customer funds to post a broker obligation.
  - totalZero 6y ago
    The broker would be using customer funds to clear a customer trade.
    - sokoloff 6y ago
      Of course they'd do that when it comes time to actually fund the trade. That's not what Robinhood's limitation was and not the subject of this article. The funds in question required to be posted to DTCC are a broker responsibility to serve as mutual insurance wherein the risk of a broker failing are shared among the brokers in some proportion to the volume and risk that they represent. These must be posted using broker funds (obviously, you can't protect customers from things outside their control by pledging customer money to be used in the event of a default).
      - totalZero 6y ago
        How, pray tell, do you think a broker actually funds an unsettled obligation on a cash-secured customer trade?

deleted 6y ago

[deleted]

MrMan 6y ago

Comments that start with saying "I don't buy" the real-world non-simple explanation, even in the face of mountains of real world evidence, are not in the spirit of any site that pretends to be some kind of better place. Conspiracy fantasies should be moderated down by the administrators. "Wide eyed curiosity" comes second to pragmatism, realism, lack of narcissism and entitlement.

vamos_davai 6y ago
There's no difference between conspiracy and hypothesis.
- cromka 6y ago
  You mean "conspiracy theory" and "hypothesis". And yes, there fundamentally is a difference between theory and hypothesis: https://www.merriam-webster.com/words-at-play/difference-between-hypothesis-and-theory-usage https://www.merriam-webster.com/words-at-play/difference-bet...
  - vlovich123 6y ago
    > Outside of scientific reasoning, "theory" and "hypothesis" are often used interchangeably, and "theory' can unfortunately be interpreted to mean "less sound" or "lightly speculated."
PragmaticPulp 6y ago
It’s scary how much conspiratorial thinking is gaining traction in the GameStop story. Despite the narratives about people buying GameStop for altruistic purposes or for sticking it to Wall Street, it’s obvious that most people bought because they were told the trade couldn’t fail and this was an easy way to double their money (or more). When it doesn’t work out, I’m worried that people will reach for more conspiracy theories instead of realizing that the latest GME buyers were always guaranteed losses.
- TuringNYC 6y ago

PragmaticPulp 6y ago

> First of all, they limited opening trades for all accounts, not just accounts buying on margin or with unsettled funds. RobinHood’s UX was built around the concept of hiding margin details from clients. All Robinhood accounts are margin accounts by default. Inbound funds transfers give people margin buying abilities before the trades arrive. Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? This is an unprecedented event and it happened very, very fast. Robinhood likely only had a few options to roll out immediately. Let’s not pretend they could have reworked their trading platform, tested and deployed the changes, and implemented the action in a matter of hours.

zaroth 6y ago
> Is it really so hard to believe that they hadn’t pre-planned the ability to limit margin purchases on a single stock? Yes, this is impossible to believe. Different stocks already have different margin requirements. Turning off margin trading for specific stocks is a fundamental system requirement.
- tptacek 6y ago
  I think all these margin discussions are a red herring. The clearinghouse requirements are based on the total number of shares sold, not the total sold on margin. As I understand it, clearing is mutual insurance against a disaster at the brokerage, not against customers randomly defaulting.
TuringNYC 6y ago
If this was the case, why not just provide an honest explanation rather than “we’re restricting this for your own good”
- dash2 6y ago
  No company likes to say "our clearinghouse doesn't trust us to settle our accounts". It makes them look unstable... as they probably are. I bet you, RH has been handing out margin the same way mortgage sellers handed out loans in 2007.

paulgb 6y ago

> If you have a cash account and you buy a stock, your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade. If they have two days to pay, DTCC is taking on some counterparty risk. Isn't that reason enough for DTCC to increase the deposit requirements when they see risk increasing? (Not a rhetorical question, you seem to know what you're talking about so I am curious what the answer is.)

totalZero 6y ago
The purpose of a clearinghouse is to manage that counterparty risk prior to settlement, and ensure that settlement occurs smoothly. Some clearinghouses like OCC carry counterparty risk throughout the life of a trade. The counterparty in question is the clearing member, ie Robinhood. If the trade is fully cash-secured then there is no risk that Robinhood will go under because it has 100% of the cash required to make good on the trade (assuming they still make enough from PFOF to cover their operating costs for a couple of days.) And for existing margin accounts, they just have to continue the practice of aggressively closing positions that fall below maintenance margin.
- tptacek 6y ago
  The NSCC formulas for this (I assume these are the relevant ones and if not that they're representative) are published. You can just go read them. I don't see where they say "if trades are made with customer cash and not on margin you don't have to account for them in the equity group collateral requirement". That also wouldn't make much sense; the clearinghouse protects participating firms from each other, not just from their customers.
  - totalZero 6y ago
    Actually, the Clearing Fund Formula accounts for Margin Requirement Differential, so margin is indeed a component of the amount posted. More importantly, cash requirement effectively reduces the amount of leverage that customers are able to use, and that means (A) no additional firm capital needs to be lent for purchases of GME or whatever other stock, and (B) margin-account customers trade less on a given amount of their own capital. Are you suggesting that Robinhood would be required by Procedure XV to post more than $1 for every $1 of GME stock that a customer buys in a cash account?

sokoloff 6y ago

> your broker has plenty of time (2days) and plenty of funds (all of them) to clear your trade I think you’re thinking about it wrong. All brokers contribute to this posted collateral and those funds, collectively, serve as a fund of mutual insurance in the event of a failure or near-failure of a participant. These are not "partial payment of customer trades, with the rest to come later". In order to prevent customers from being affected by that near-failure, the clearinghouse first goes to that struggling broker and then to this mutual insurance fund. That is the reason why this must be funded with broker funds rather than customer funds, so the fact that you 100% paid for your shares doesn’t mean that the broker has “all of the funds” required because they can’t use your money to post this. (Otherwise “to protect customers” is not accomplished.)

dannyw 6y ago

DTCC raised collateral requirements for GME from 2% to 100%.

spurgu 6y ago
Source?
- noughtme 6y ago
  While DTCC did not publicly confirm the amount, it did confirm that capital requirements were raised January 28. Given that numerous participants have publicly stated it was to 100%, that seems likely. https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-and-how-did-it-stop-gamestop-mania-quicktake https://www.bloombergquint.com/quicktakes/what-s-the-dtcc-an...
  - deleted 6y ago
    [deleted]
  - erichocean 6y ago
    But but but that's not market manipulation, that's just one company doing a normal thing in the normal course of business… I'm sure it had nothing to do with GME.
    - threedots 6y ago
      It had lots to do with GME in that GME was the source of the risk (because of its through the roof volatility) that the DTCC was protecting against. But if your implication is that the DTCC has a dog in that fight you are way off base - they exist several layers below hedge funds in the trading stack and have nothing to do with each other, in fact I'd be willing to bet Gabe Plotkin couldn't even tell you what DTCC stands for.
tptacek 6y ago
Is that documented somewhere? I absolutely believe it, I'm just curious.