Collaboration is key to improve settlement efficiency, WFC speakers agree
06 June 2023 Czech Republic
Image: piter2121/stock.adobe.com
Panellists on the ‘Settlement efficiency’ panel at this year’s World Forum of Central Securities Depositories (WFC) agreed that the industry needed to work collectively to improve settlement fail rates.
The discussion delved into the reasons for settlement fails, the approach of shortened settlement cycles and predictions for the future.
When asked what the cause for settlement fails is, one speaker explained that the root cause of fails is often unknown. While a lack of securities and instructions remaining on hold are frequent culprits, the real reason can only be known by participants, he went on.
Michele Hillery, general manager of equity clearing and DTC settlement service at DTCC, highlighted the importance of ensuring that allocations and affirmations are processed in a timely way.
Charlie Geffen, chair of the UK Accelerated Settlement Taskforce, added that there is an overall lack of investment in post-trade settlement infrastructure and policies across the board. While this issue may be concentrated on the buy-side, it touches all aspects of the market, he said.
The panellists raised a number of ways in which settlement efficiency could be improved. Hillery noted that different markets have different approaches to penalties on fails. Moderator Alina Dragomir drew attention to the positive reception that recently-introduced cash penalties have received in the EU, an attitude echoed by the results of an audience poll which placed cash penalties as the third most effective tool to improve fail rates.
One panellist emphasised the importance of having the right data before the settlement date and ensuring that settlement structures are accurate. The speakers also suggested that methods such as partial settlement, security lending and borrowing and the use of straight-through processing could be beneficial in improving efficiency.
Several new technologies were identified as having the potential to reduce settlement fails. AI was seen as promising, with one speaker suggesting that it could be used to determine the actual likelihood of a settlement. Hillery cautioned that there needs to be a “robust governance structure” in place around AI to ensure that bias is avoided.
One speaker raised distributed ledger technology (DLT) as something that could be useful for specific areas, such as corporate actions management. Another panellist agreed, but cautioned that the implementation of technology such as DLT should be used to address specific pain points, rather than being universally adopted.
He went on to say that emerging technologies should be used to complement and improve rather than replace that which already exists, something echoed by Hillery’s affirmation that technology can be applied to the right use cases and does not need to be “all-in”. One panellist, agreed that specific use cases need to be focused on when it comes to new technology, with Dragomir advocating for “tailored solutions to meet specific needs”.
Although decisions should be made on a case-by-case basis, with associated risks carefully managed and well-structured governance in place, the potential of new technology is “enormous”, according to Geffen.
Closing the panel, the speakers agreed that improving settlement efficiency will require the collaboration of market participants across the industry, and is not the sole responsibility of central securities depositories. Dragomir concluded that, going forwards, the industry needs to focus on “communication, cooperation and working towards shared goals.”
The discussion delved into the reasons for settlement fails, the approach of shortened settlement cycles and predictions for the future.
When asked what the cause for settlement fails is, one speaker explained that the root cause of fails is often unknown. While a lack of securities and instructions remaining on hold are frequent culprits, the real reason can only be known by participants, he went on.
Michele Hillery, general manager of equity clearing and DTC settlement service at DTCC, highlighted the importance of ensuring that allocations and affirmations are processed in a timely way.
Charlie Geffen, chair of the UK Accelerated Settlement Taskforce, added that there is an overall lack of investment in post-trade settlement infrastructure and policies across the board. While this issue may be concentrated on the buy-side, it touches all aspects of the market, he said.
The panellists raised a number of ways in which settlement efficiency could be improved. Hillery noted that different markets have different approaches to penalties on fails. Moderator Alina Dragomir drew attention to the positive reception that recently-introduced cash penalties have received in the EU, an attitude echoed by the results of an audience poll which placed cash penalties as the third most effective tool to improve fail rates.
One panellist emphasised the importance of having the right data before the settlement date and ensuring that settlement structures are accurate. The speakers also suggested that methods such as partial settlement, security lending and borrowing and the use of straight-through processing could be beneficial in improving efficiency.
Several new technologies were identified as having the potential to reduce settlement fails. AI was seen as promising, with one speaker suggesting that it could be used to determine the actual likelihood of a settlement. Hillery cautioned that there needs to be a “robust governance structure” in place around AI to ensure that bias is avoided.
One speaker raised distributed ledger technology (DLT) as something that could be useful for specific areas, such as corporate actions management. Another panellist agreed, but cautioned that the implementation of technology such as DLT should be used to address specific pain points, rather than being universally adopted.
He went on to say that emerging technologies should be used to complement and improve rather than replace that which already exists, something echoed by Hillery’s affirmation that technology can be applied to the right use cases and does not need to be “all-in”. One panellist, agreed that specific use cases need to be focused on when it comes to new technology, with Dragomir advocating for “tailored solutions to meet specific needs”.
Although decisions should be made on a case-by-case basis, with associated risks carefully managed and well-structured governance in place, the potential of new technology is “enormous”, according to Geffen.
Closing the panel, the speakers agreed that improving settlement efficiency will require the collaboration of market participants across the industry, and is not the sole responsibility of central securities depositories. Dragomir concluded that, going forwards, the industry needs to focus on “communication, cooperation and working towards shared goals.”
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