AFME and Deloitte releases post-trade inefficiencies paper
31 October 2023 Europe
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The Association for Financial Markets in Europe (AFME) and Deloitte have published a report detailing the causes of settlement fails in the EU securities market. They offer a number of recommendations on how post-trade processes could be made more efficient.
While the introduction of cash penalties under the Central Securities Depositories Regulation (CSDR) has reduced settlement fails somewhat, particularly for equities, the report affirms that inefficiencies remain, prompting higher costs and increased risk.
The organisations state that there is a lack of high-quality, granular, public data around settlement the rates of and reasons for settlement fails in Europe, which makes an accurate assessment of the current environment challenging. As such, the data used in the report to track post-trade lifecycle inefficiencies is gathered from a range of sources.
In order to improve post-trade processes, and prepare the market for a potential transition to T+1, AFME outlines three main targets; the reduction of exceptions, the expedition of exception resolution and the optimisation of the settlement of available inventory.
The first of these requires all information needed for the settlement process to be provided on trade date, AFME says, with the introduction of a regulatory requirement for the completion of allocation and confirmation processes on trade date. Known reference data issues need to be addressed, and the exchange of non-economic trade data must be improved.
To expedite exception resolution, AFME encourages consideration of the introduction of a unique transaction identifier in the post-trade process. Additionally, known gaps and inconsistencies in market standards must be attended to, and consistent criteria and tolerance between pre-settlement matching and CSD-level matching should be established.
Finally, AFME recommends that auto-partial settlement and hold with partial release should be offered by CSDs, and facilitated and encouraged by intermediaries for end users. CSDs should also either increase the frequency of their settlement batches or operate real-time
AFME adds that the efficacy of its recommendations, and improvements in settlement efficiency as a whole, could be bolstered by better availability of high quality, standardised and comparable data. The fails reporting methodology used under CSDR should also be reviewed, it states, ensuring that it is accurately identifying risks and inefficiencies.
Pete Tomlinson, director of post trade at AFME, says: “Although there is some evidence that CSDR has improved settlement fail rates, it is critical that more work is done to address remaining inefficiencies. 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.”
While the introduction of cash penalties under the Central Securities Depositories Regulation (CSDR) has reduced settlement fails somewhat, particularly for equities, the report affirms that inefficiencies remain, prompting higher costs and increased risk.
The organisations state that there is a lack of high-quality, granular, public data around settlement the rates of and reasons for settlement fails in Europe, which makes an accurate assessment of the current environment challenging. As such, the data used in the report to track post-trade lifecycle inefficiencies is gathered from a range of sources.
In order to improve post-trade processes, and prepare the market for a potential transition to T+1, AFME outlines three main targets; the reduction of exceptions, the expedition of exception resolution and the optimisation of the settlement of available inventory.
The first of these requires all information needed for the settlement process to be provided on trade date, AFME says, with the introduction of a regulatory requirement for the completion of allocation and confirmation processes on trade date. Known reference data issues need to be addressed, and the exchange of non-economic trade data must be improved.
To expedite exception resolution, AFME encourages consideration of the introduction of a unique transaction identifier in the post-trade process. Additionally, known gaps and inconsistencies in market standards must be attended to, and consistent criteria and tolerance between pre-settlement matching and CSD-level matching should be established.
Finally, AFME recommends that auto-partial settlement and hold with partial release should be offered by CSDs, and facilitated and encouraged by intermediaries for end users. CSDs should also either increase the frequency of their settlement batches or operate real-time
AFME adds that the efficacy of its recommendations, and improvements in settlement efficiency as a whole, could be bolstered by better availability of high quality, standardised and comparable data. The fails reporting methodology used under CSDR should also be reviewed, it states, ensuring that it is accurately identifying risks and inefficiencies.
Pete Tomlinson, director of post trade at AFME, says: “Although there is some evidence that CSDR has improved settlement fail rates, it is critical that more work is done to address remaining inefficiencies. 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.”
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