> How a clearinghouse judges these risks, and therefore when it makes demands for more upfront funds, is typically formulaic. Margins can be based on equations such as value-at-risk. Exactly how the formula works, and who is responsible for losses in what order, are important elements. In the case of National Securities Clearing Corp., losses would be covered by the defaulting member’s funds before the clearinghouse’s own funds or other members’ funds would be used.
I'd say it's very likely that it wasn't formulaic this time, since Robinhood's CEO said in an interview with CNBC that we was called at like 4AM, well after markets closed, to deal with the new requirements.
I've only been sorta paying attention so i could be wrong but trades were not suspended or halted? only buying was prevented, and only for some brokerages?
> Only buying was prevented, and only for some brokerages?
The first part of that has been a common bit of misinformation. Opening new positions (either by attempting to buy shares of the stock, or entering into a new short position) is what was prevented. Closing positions (selling for owners of shares, or in the case of short obligations buying shares) was still allowed as closing reduces credit risk for the broker.
The brokerages that did restrict, were smaller firms and did so to maintain liquidity for all assets, instead of allowing a vast amount of their capital to be consolidated largely into a few assets, due to the increased capital cost of clearing.
It's a fair question. A bunch of the larger guys like Charles Schwab and TD did implement restrictions as well.
In their case, it may not have been a necessity to maintain liquidity for other assets, but capping the exposure to how much capital they were putting down for it probably still made sense.
> “The bottom line is that clients are still able to trade in GME, but we’ve put some restrictions on certain types of transactions in the interest of helping mitigate risk for our clients,” Schwab said Wednesday in a statement.[0]
They very much did 3 weeks ago. Not to the same degree as the smaller brokerages, but they still put limitations on margin trading, and restrictions on options.
Exchanges repeatedly halted for brief periods, based on predetermined rules. That part was nothing special, it's something like 5 minutes at a time,
Buying to open new positions was blocked by some brokers in response to the the bump in collateral requirements they were required to fulfill. Some brokers were capable of blocking only margin account trading, but RH sounds like they blocked all buyers (plus their target market is margin account holders)
DTCC is basically interested in ensuring that trade settlement occurs. They eliminate a lot of counterparty risk, but the flipside to that is that they clearly have discretion that surprises brokers.
It's the collateral increase that caused Robinhood and other no-fee brokerages to halt trading. Brokerages which had the ability to charge for trades simply required more cash on hand and charged slightly more for the trade.
Stock purchases are settled after 2 days. If the buyer goes broke before that, the seller would be left holding to bag. To mitigate this risk you need to post collateral.
But it's not the brokerage's money on the line, it's DTCC's. From the perspective of the DTCC, there's no difference between a retail brokerage buying $10M of GME and lehman brothers buying $10M of GME.
But if the brokerage already has your money they can use it to post collateral. And yet they banned everyone from buying. A lot of stuff doesn't add up here.