The Association for Financial Markets in Europe (AFME) has partnered with Deloitte to publish an in-depth exploration of the causes of settlement fails in the EU securities market, along with a set of recommendations to improve post-trade efficiency and lay the groundwork for a possible move to T+1.
“Although there is some evidence that the Central Securities Depositories Regulation (CSDR) has improved settlement fail rates, it is critical that more work is done to address remaining inefficiencies,” said Pete Tomlinson, director of post-trade at AFME.
“This work becomes particularly important in the context of a potential move to T+1. Our analysis highlights that the importance of pre-settlement matching processes is even greater in European markets than for other jurisdictions, given the differences in market structure, processes and standards.”
The group warned that the lack of high-quality, granular, public data on settlement fail rates and reasons had proved a significant barrier to assessing the current environment. “Improving data quality and standards throughout the lifecycle, as well as the provision of more granular CSD-level data is critical to enabling the industry to identify issues and develop solutions,” urged the group.
Nevertheless, through the use of a variety of data sources the report the research has resulted in the development of a series of recommendations designed to improve post-trade processes and support any potential future shift towards a shorter settlement cycle.
Moving forwards
The principle drivers of settlement inefficiency, according to the research, relate to counterparty behavioural factors (affecting the ability to match and allocate trades); data quality issues (likewise affecting the ability to match and allocate trades); and inventory management issues (affecting the ability to settle matched trades).
In addition, the research highlights the difference between matched and unmatched fails, noting that the majority of unmatched fails could in fact be avoided through the improvement of pre-settlement processes.
The report outlines three key recommendations to address these issues, including:
- Reducing exceptions. All information necessary for settlement should be provided on the trade date, supported by a regulatory requirement to complete allocation and confirmation processes on the same date. Notable reference data issues (including instrument and calendar data) also need to be solved, while the exchange of non-economic trade data such as SSIs should be improved.
- Expediting exception resolution – including the potential adoption of a Unique Transaction Identifier (UTI) in post-trade processes. Gaps and inconsistencies in market standards also need to be addressed, including on “give-up” transactions; while consistent criteria and tolerances between pre-settlement matching and CSD-level matching should be ensured.
- Optimising settlement of available inventory – with CSDs offering auto-partial settlement and hold with partial release. Intermediaries should also facilitate and encourage use of auto-partial/partial release by end users.
The group has developed a set of proposals to drive adoption of these recommendations, which it believes will enable and promote settlement acceleration in Europe as and when it is adopted. It should also help firms with US operations to meet the new requirements arriving in May 2024 with the North American shift to T+1.
The proposals include steps to be taken by both AFME and its members, as well as calling for changes to relevant regulatory guidelines and market practices. The report also suggests the creation of a target cross-industry action group to review relevant data and define appropriate performance metrics, find solutions to common issues and coordinate their implementation.
“This AFME report underscores the need for improvements in the EU securities market. But with discussion around the potential shift to T+1 settlement cycles across Europe in play, there are still longstanding operational inefficiencies that need to be addressed,” warned Steve Carlin, VP product management at AutoRek, speaking to BEST EXECUTION.
“To ensure settlement fails continue to fall across Europe, financial institutions must conduct a full review of their back-office processes across the trade lifecycle to identify and stamp out any inefficiencies. Firms that do not automate their manual processes are likely to have a higher volume of trade errors, which could cause settlement fails to rise sharply again.”
©Markets Media Europe 2023
