February 9, 2022 was an extremely active day for the US Securities and Exchange Commission (SEC) as it announced a handful of proposals that will impact the US securities market’s structure and operations. Most notably, the SEC introduced a proposal that would shorten the standard settlement cycle from two business days after trade date (“T+2”) to one business day after the trade date (“T+1”). It also requested specific comments regarding the achievement of settlement by the end of trade date (“T+0”).
At Paxos, we’re pleased to see Chair Gensler’s focus on improving efficiencies and reducing risk in equity settlement cycles. These efforts can improve not only the efficiency and effectiveness of US securities markets but can also support increased competition and global competitiveness.
Chair Gensler has previously stated that time equals risk. We’ve always agreed with this perspective. Paxos was founded with the belief that market infrastructure needs to be modernized and accelerated because there is too much risk inherent in core utilities as they exist today. That’s why Paxos has been working for years on a solution to shorten settlement. We’ve successfully built a solution called the Paxos Settlement Service that settles trades on T+2, T+1 and T+0 – really, settlement on any cycle. That means, with Paxos, T+1 and T+0 are available today, not next year.
How We Got to T+1 (and any Settlement Cycle) Being A Reality Today:
- On October 28, 2019, Paxos sought and received no-action relief from SEC Staff to conduct a feasibility study of the Paxos Settlement Service.
- For two years, we demonstrated the viability and benefits of accelerated settlements. Our participant partners Bank of America, Credit Suisse, Instinet, and Societe Generale, settled bilateral delivery-versus-payment trades using our proprietary, blockchain-based settlement system.
- We ran the feasibility study and settled live US equity trades every day, even during times of extreme volatility.
- We tested every combination of settlement cycles and adjusted the product so our participants had the optimal experience.
- We successfully completed the feasibility study on October 28, 2021.
- Prior to the conclusion of the study, we filed an application with the SEC for a full equities clearing agency registration on October 18, 2021 and, once published, look forward to receiving public feedback on our proposal.
In order for Paxos to introduce this innovation to the market for the long-term, we must have a clearing agency registration – and applying to become a registered clearing agent with the SEC is no easy feat. It’s an intensive, detailed process that we’ve spent the better part of two years completing. It’s so extensive that there is no competition in settlement today; in fact, no one has competed in the equities clearing space since the NSCC received it’s clearing agency registration almost 50 years ago. We chose this path because we so firmly believe that the only way to move the market forward is to introduce competition and implement flexible, interoperable technology.
Since submitting our application, we’ve been excited to move to the public comment phase, which is required prior to approval as a clearing agency. Specifically, we look forward to the Commission soon filing notice in the Federal Register seeking public comments regarding our submission. Paxos is seeking to re-platform the infrastructure of the US securities markets. Our efforts are designed to ensure US markets remain the most dominant, largest and transparent of global securities. While other geographies have introduced innovation in settlement, the US has not focused resources on making critical infrastructure upgrades. Now, something that has brought prestige to the US for hundreds of years, is left vulnerable to aging, outdated technologies.
Because of our desire to revolutionize markets and reaffirm the primacy of US securities markets, the sooner the public can comment on our proposal the sooner any necessary adjustments to our model can be addressed. Then the US can lead and become the first major market to introduce same day securities settlement.
The bottom line is that market participants deserve safer and faster settlements and the public deserves reduced concentration risk in public markets. At Paxos, we look forward to competing in this space and introducing real innovation today.