> they raised deposit requirements potentially more than was standard
What is your source for this?
DTCC collateral requirements are calculated using, more or less, a fixed, predictable formula. And the DTCC isn't the ultimate creditor in these arrangements. They are drawing on lines of credit from banks, who are ultimately taking the credit risk of the collateral being insufficient for settlement.
Vlad said live on air (in Clubhouse) in conversation with Elon Musk on Sunday that the clearinghouse increased their requirements from (IIRC) 30% to 100%, and that the formula for calculating that was "not transparent" and had a component that was "a multiplier based on their opinion".
RH negotiated with them all Thursday last week and reduced the required payment from $3B to ~$0.7B. So it sure seems like the DTCC made an arbitrary decision to jack up systemic safety cushion that resulted in the RH clients turning very sour.
DTCC has higher requirements for concentrated positions than for other uncleared CNS positions. Couple this with Robinhood laying out its own capital to fund margin trades and Robinhood Instant trades, and you've got some pretty aggressive capital commitments.
(PROCEDURE XV)
288
II. if the absolute value of the largest non-index position in the portfolio
represents more than 30 percent of the value of the entire portfolio (the
“concentration threshold”), an amount determined by multiplying the gross
market value of such position by a percentage designated by the
Corporation, which percentage shall be not less than 10 percent. Such
percentage shall be determined by selecting the largest of the 1st and
99th percentiles of three-day returns of a composite set of equities, using
a look-back period of not less than 10 years that includes a one-year
stress period,2 and then rounding the result up to the nearest whole
percentage.
The concentration threshold would be no more than 30 percent, and would
be determined by the Corporation from time to time and calibrated based
on the portfolio’s backtesting results during a time period of not less than
the previous 12 months.
Also, the fact that the man running Robinhood gave out material nonpublic information on a a private podcast with a billionaire says a lot about his judgment, in my opinion.
> had a component that was "a multiplier based on their opinion"
I'll chalk this up to colloquialism. The DTCC has very little discretion in what they do. That's why they're trusted to do it.
The "opinion" component could be a reference to their line of credit banks, who adjust the rates they charge the DTCC based on their varied risk models. There is a valid argument that there isn't as much transparency in that layer as there could be. But that isn't relevant to this case.
Any off-the-shelf collateral cost estimation tool should have told you, given GME's realized volatility in the week prior to the fiasco, that it was a high clearing risk. If the CEO is getting blindsided by the DTCC at 3AM, it's a oversight of internal controls.
> RH negotiated with them all Thursday last week and reduced the required payment from $3B to ~$0.7B
Negotiating collateral requirements involves netting out trades and delaying settlement on some trades and accelerating settlement on others. It does not involve recomputing collateral rules. (The DTCC can't recompute collateral rules for one member over another.)
In his chat with Elon Musk, the RH CEO said that Robinhood was given the $3B bill at 3am in the morning, and got it down to $0.7B after saying they would only allow closing out of positions for "meme stocks".
By his own words, RH took the first step to "change the game", which I am not really seeing discussion of anywhere. The DTCC certainly did not change any rules for them, but this still feels unprecedented.
It seems that they used this right by the fact that Robinhood was able to negotiate their deposit [0]. The DTCC demanded $3 billion. Robinhood negotiated down to $1.4 billion. If done by the formula, how is this possible?
We may not find out this news cycle, but my guess would be they wanted collateral for pending trades, and they eventually agreed on future trades only. The amount RH eventually raised, $3.4 billion, is in line with that.
... and now you will presumably give us an example of a case similar to GME where collateral requirements were not raised so we can see that the treatment was not standard?
What is your source for this?
DTCC collateral requirements are calculated using, more or less, a fixed, predictable formula. And the DTCC isn't the ultimate creditor in these arrangements. They are drawing on lines of credit from banks, who are ultimately taking the credit risk of the collateral being insufficient for settlement.