Exhibit A: Robinhood's Collateral Crunch Explanation Puzzles Wall Street (Bloomberg, February 6, 2021) (Dkt. 454-1, S.D. Fla.)

Summary

Exhibit A (Document 454-1) in Case 1:21-md-02989-CMA, entered on the FLSD docket 01/28/2022, reproduces an article by Annie Massa, Yalman Onaran, and Matthew Leising dated February 6, 2021, 8:00 AM EST. The article reports that a week after Robinhood Markets tried to explain why it slapped controversial limits on trading hot stocks, Wall Street's risk professionals are still perplexed about how the firm was so ill-prepared for an obvious surge in collateral calls. It quotes David Weisberger saying that they obviously fell very, very short, and quotes Jim Swartwout of Robinhood Securities on the surge in trading volume. It also states that Robinhood has said the DTCC contributed to a 10-fold jump in weekly clearinghouse deposit requirements for equities, and that Vlad Tenev has credited the DTCC for being reasonable and ultimately accepting $700 million.

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Case 1:21-md-02989-CMA Document 454-1 Entered on FLSD Docket 01/28/2022 Page 1 of 9

Exhibit A
asRobinhoscd's Colateral-Crunch Explanationy2s/2022 Page 2 of
Puzzles Wall Street

a Veterans say estimating DICC requests is just part of business
a Yet ‘they obviously fell very, very short’ of the money needed

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By Annie Massa, Yalman Onaran, and Matthew Leising S
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February 6, 2021, 8:00 AM EST

A week after Robinhood Markets tried to clear the air by explaining

why it slapped controversial limits on trading hot stocks, Wall

Street’s risk professionals are still perplexed: How was the firm so ill-
prepared for an obvious surge in collateral calls?

To the financial industry, anticipating collateral demands from hubs
such as the Depository Trust & Clearing Corp. is Brokerage 101.
Major firms assign teams to study the DTCC’s methodology, estimate
its requests and make sure ample cash is available. Everyone
grumbles, sure, but they also know what happens when firms fall
short: They scramble for a lifeline or shut down. Robinhood

gathered billions from backers to keep it going. https://;www.bloomberg.com/news/articles/202 1 -02-06/robinhood-s-collateral-crunch-explanation-puzzles-wall-
street
“They obviously fell very, very short,” said David Weisberger, a
Brothers and Morgan Stanley. He said he’s been puzzling over
Robinhood, given what he called the “well known” requirements of
clearinghouses. “This was a franchise-threatening event.”

The Silicon Valley startup left users fuming by temporarily
restricting certain purchases at the height of January’s mania over
GameStop Corp. and other “meme stocks” that were in the midst of

skyrocketing. By the end of this week, as millions of customers were mixpanel
downloading its app to trade the fallen darlings and new ones, risk

managers were still stuck on how Robinhood ended up in the Answer questions 10x
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Reached for comment, a company spokesperson referred to a

Robinhood Securities, Jim Swartwout.

“We have grown rapidly. And we have, at times, encountered
challenges as we've scaled to meet this moment,” Swartwout wrote,
describing how the firm’s growth and a surge in trading volume
fueled collateral demands. “To say the overnight increases in
volume Robinhood experienced last week were extraordinarily high
would be a vast understatement. The surge was magnitudes higher
than the norm.”
Chief 1d,0298 Officer Vlad Tenev has linked the trading restrictions ____

part of the DTCC, which Robinhood has said contributed to a 10-fold
jump in weekly clearinghouse deposit requirements for equities.
While Tenev has credited the DTCC for being reasonable and
ultimately accepting $700 million, he has at times portrayed its
formulas as opaque, noting they include a “discretionary”
component.

“We don’t have the full details” of how the DTCC arrived at its initial ae Seamlessly sync
demand, Tenev told Elon Musk last weekend in an interview your 07 line storé”
broadcast on the social-conversation app Clubhouse. “It would inventory no matter
obviously be ideal if there was a little bit more transparency so we where you sell it.

could plan better around that.”

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The rejoinder from industry executives: It’s pretty much just math.

‘Shame on Them’

In interviews, more than a half-dozen senior risk executives -- some
from Wall Street’s largest firms -- reacted with bemusement to any
assertions that the magnitude of the DTCC’s demands can’t be
anticipated. They spoke on the condition they not be identified, in
some cases because they interact with Robinhood.
of pinpointing what clearinghouses will seek, and that things can go
wrong. Some executives even recounted times when they got
pressed for millions of additional cash on short notice. But overall,
the group said that large, well-run firms don’t get surprised by

requests that threaten to empty their pockets.

One brokerage executive said Robinhood should have ensured it had
enough capital or stopped processing trades of volatile stocks.
Charles Schwab Corp.’s TD Ameritrade, for example, began limiting
bets on certain meme stocks the day before Robinhood did.
Robinhood’s later restrictions were more severe, tapering off into

the week that followed.

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Forex trading involves risk. Losses can exceed
deposits.

“Once every decade or so there are improbabilities that occur,” said

Weisberger, who now runs cryptocurrency venture CoinRoutes. Self-
clearing firms such as Robinhood need to know what potential
demands they could face. “If they studied it and came up with an
answer and it was wrong, well shame on the people who studied it.”
he said. “If they didn’t study it, well then shame on them.”
Avoiding Surprises
1:21-md-02989-CMA Document 454-1 Entered on FL

The DTCC bases much of its deposit demands on elements including
a clearing member’s concentration in volatile stocks, the volume of
trades occurring, imbalances in buying and selling, and the firm’s
financial condition. The more a brokerage is exposed to erratic
shares, the more collateral it has to post. The less capital a
brokerage has on hand, the more severe its surcharge may be.

The goal is to Eevee the broader — system from —
sedis “reporting and other tools to our desig members to help
them anticipate their margin requirements for a particular
portfolio.”

The nightmare that clearinghouses are designed to avoid is that a
brokerage loses so much money before a trade is completed that the
firm can’t hold up its end of the transaction. Without a
clearinghouse, one firm’s failure could cascade through the financial
system. Unwinding just one trade means undoing all of the
subsequent transactions if that share already was resold.

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A broker-dealer’s collateral burden rises if it lends money to
customers, and especially if they bet heavily on, say, stocks that have
recently multiplied in value, as GameStop and others did last month.
If prices suddenly crash -- which also happened -- it raises the risk

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that clients may not be able to repay their margin loans, leaving the
be attributable to Robinhood liquidating clients’ positions to head

off defaults on loans, according to Wall Street risk managers.

Page

Read more: GameStop wraps up worst week ever, leaving $18 billion

“Someone’s got to pay,” said Eric Budish, a professor of economics
at the University of Chicago's Booth School of Business. If you're a
brokerage, “you have capital to deal with that existential risk. I was
surprised Robinhood didn’t have more capital for that scenario.”

Margin lending constituted about 20% of Robinhood’s $6.7 billion
balance sheet in mid-2020. Robinhood tapped credit lines and
raised about $3.4 billion from investors at the end of January.

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Robinhood, founded in 2013, has been hiring Wall Streeters to help
integrate the startup into the more traditional financial system. The
firm appointed former Securities and Exchange Commission
member Dan Gallagher, Fidelity Investments’ Norm Ashkenas and
Wells Fargo & Co.'s Kelly Zigaitis to senior legal and compliance
roles.
‘Rbphinho@2'9 S<oNbNonDocument 454-1 Entered on FLSI

This week, Robinhood offered its own prescription to avoid future
problems: The U.S. stock market should abandon its two-day

settlement system and switch to a real-time process.

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Moving the U.S. equity market to instantaneous settlement is a huge Don’t tell them.
undertaking that would require years of work. Two components of =
trading would probably need to be digitized: The securities and the With interos you
cash to pay for them. Digitally representing a security like a stock or can show them.
bond isn’t difficult and a small-scale effort by Paxos Trust Co. to use
blockchain to settle stock trades in near real-time received a green
light from the SEC in 2019.

Digitizing U.S. dollars to pay for stocks is years off, if it ever happens.
Another hurdle is all of the banks, brokerages, hedge funds and
trading firms that buy and sell shares would need to update their
systems to make the change. The transition would no-doubt be
expensive.

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Australian Stock Exchange so settlement times could be cut from
days to minutes. The project has been extended repeatedly and is
currently two years behind schedule.

Meanwhile, Robinhood is fortunate to have access to venture capital
to weather a rough patch, said Joanna Fields, founding principal at
market structure consultancy Aplomb Strategies.

“There are firms that have controls, governance frameworks and
processes, and that do not have the capability of getting that kind of
capital infusion,” she said.

— With assistance by Jennifer Surane


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