Industry dialogue and data collaboration
Oct 2024
With America's successful T+1 transition now complete, Pardeep Cassells, head of client experience at AccessFintech looks at what lessons have been learned for the upcoming European and UK implementations?
Image: AccessFintech
After months of preparation and a tense start to the year, the industry’s success in transitioning to T+1 settlement in North America and beyond feels like clouds clearing for the industry. Summer has finally arrived, and we are all breathing a sigh of relief after a positive start to this new era. While a few data points do not tell a complete story, early numbers indicate the industry as a whole was broadly prepared, specifically for North America’s shift to a shortened settlement cycle.
First, trade fail rates have remained stable following the T+1 implementation on Tuesday, 28 May. Settlement fail rates remained below two per cent on the first two days of the transition, an impressive accomplishment given that the average fail rate for the period in May prior to the faster settlement was 2.01 per cent.
Next, the first three days post-transition saw gradual improvements in affirmation rates, rising from 92.76 per cent to 94.55 per cent and then 94.66 per cent. Finally, fails saw slight increases on days three and four, with affirmations also dipping to 91.26 per cent on 31 May (day four) following the MSCI rebalancing that same day.
However, this does not necessarily mean it is time to relax — full adoption into ‘business as usual’ may yet see some impact across the market. As project teams and temporary resources step away, the distinction between the settlement and affirmation rates of organisations who have introduced increased automation and seized the opportunity to re-evaluate operational processes compared to those who have used increased headcount as a sticking plaster solution is likely to become more apparent.
Meanwhile, the next set of clouds is gathering on the horizon. As Europe and the UK’s deadlines for T+1 are still a few years away, now is a valuable time to reflect on the lessons we learned from this round of transitions and prepare for the challenges Europe and the UK will face in their move to shortened settlement cycles.
What comes next?
The UK’s Accelerated Settlement Taskforce has recommended that the UK makes the transition no later than by the end of 2027, while Europe’s shift could follow a similar timeframe.
Both the UK’s taskforce and the European Securities and Markets Authority (ESMA) have stated that they look forward to engaging with one another to coordinate the move and ensure that the transition is efficient and cost effective, supporting a safe, resilient and integrated post-trade environment.
For the UK, this change is theoretically more straightforward as this is a single clearer region with a single legal framework to contend with. Europe, however, faces unique challenges.
With multiple jurisdictions, nearly 40 central securities depositories (CSDs) and myriad legal frameworks, even navigating all of the impacted markets may be a challenge, although organisations such as the Association for Financial Markets in Europe (AFME) continue to encourage cross-market collaboration.
Unlike North America, Europe requires instructions to be matched at the CSD prior to settlement, and participants face higher levels of cross-border settlement activity with counterparties often instructing in different CSDs. This is a layer of complexity that market participants are already starting to consider through work with industry bodies and ESMA.
In addition, European market participants are awaiting the final report from the ongoing Central Securities Depositories Regulation (CSDR) refit, which is expected to be published later this year or early 2025. This could see the introduction of a progressive penalty regime and possibly significantly increased penalties — albeit the latter impact seems to be scaling back from the initially proposed seven to ten-fold penalty increase, which is welcome news to many.
A parallel project to revise CSDR calculations and workflows resulting from a refit while preparing for T+1 in Europe will undoubtedly lead to additional stress on the industry.
Regardless of the scale and scope of the refit proposals, an ongoing CSDR regime in an accelerated settlement landscape adds a unique layer of complexity to planning, as increased cash reserve requirements for funding potential CSDR penalties compound the increased reserves needed for managing faster FXs for international activity.
Lessons learnt and the route forward
The successful change in North America has shown the importance of industry collaboration and communication in comfortably navigating such events.
Building on the foundation of insights gained through previous settlement cycle changes to use the best of what has worked before will also be necessary for further successful transitions.
Giving consideration to the October 2023 AFME report, ‘Improving the Settlement Efficiency Landscape in Europe’, three principal drivers of settlement inefficiencies have been identified for the market to consider: data quality, counterparty behaviour, and inventory management.
The importance of data quality in improving settlement efficiency is recognised across the industry and is an area of keen interest for me. This dates from my days leading a trade management function to my experience today where I see AccessFintech’s network participants hold themselves and each other to account to achieve high quality data standards.
Enforcing a comprehensive, agreed minimum data set across the trade lifecycle, combined with AccessFintech’s data normalisation which refines over 60,000 data attributes daily, has a clear and evidenceable impact on timely settlement and the eradication of manual effort.
Quality data from the outset, particularly in relation to trade economics including Standard Settlement Instructions (SSIs), PSET, and many more, enables organisations to ensure right-first-time matching and maximises timely settlement, mitigating the risk of CSDR penalties and moving the market towards a more normalised accelerated settlement cycle. In addition, clean settlement location information and a firm grasp of where positions are held directly reduce instances of delivery failure due to inventory issues, which often arise from holdings requiring movement from one depot to another.
A collegiate approach to enforcing good data standards by market participants themselves and growing market momentum towards data collaboration, which reduces the need for excessive query traffic, also lends itself to 'better counterparty behaviour' and intrinsic behavioural change.
The importance of industry dialogue and data collaboration
Industry dialogue and collaboration is the distinguishing factor that drives truly impactful change across the market. Only by working together will we collectively improve settlement efficiency and meet the challenges of T+1 changes to come. Improved data centralisation, normalisation and collaboration are foundational. By harnessing data in this way, optimised processes and real-time decision making will be unlocked.
AccessFintech has been and will continue to partner with firms globally to address this. Our Synergy Network connects executing brokers, prime brokers and custodians together with their clients to provide real-time data collaboration. This network now covers approximately 80 per cent of global market equity and fixed income trade activity.
Our services have helped organisations achieve fail rate reductions of up to 40 per cent and query traffic reductions of up to 90 per cent, freeing operational capacities and enabling proactive interventions to prevent trade fails within a shorter settlement timeframe.
Our AI capabilities continue to grow as we look to roll out our Predicted to Fail Probability feature which will enable firms to automate repairs based on our published insights. This innovation promises to further drive settlement efficiency by increasing automation, releasing capacity and minimising risk.
As the industry heads to the beach this summer, we can all take a bit of pride in the role we played in supporting North America’s transition to T+1. When we return, rested and revitalised, we should be ready to prepare for the next round of changes.
First, trade fail rates have remained stable following the T+1 implementation on Tuesday, 28 May. Settlement fail rates remained below two per cent on the first two days of the transition, an impressive accomplishment given that the average fail rate for the period in May prior to the faster settlement was 2.01 per cent.
Next, the first three days post-transition saw gradual improvements in affirmation rates, rising from 92.76 per cent to 94.55 per cent and then 94.66 per cent. Finally, fails saw slight increases on days three and four, with affirmations also dipping to 91.26 per cent on 31 May (day four) following the MSCI rebalancing that same day.
However, this does not necessarily mean it is time to relax — full adoption into ‘business as usual’ may yet see some impact across the market. As project teams and temporary resources step away, the distinction between the settlement and affirmation rates of organisations who have introduced increased automation and seized the opportunity to re-evaluate operational processes compared to those who have used increased headcount as a sticking plaster solution is likely to become more apparent.
Meanwhile, the next set of clouds is gathering on the horizon. As Europe and the UK’s deadlines for T+1 are still a few years away, now is a valuable time to reflect on the lessons we learned from this round of transitions and prepare for the challenges Europe and the UK will face in their move to shortened settlement cycles.
What comes next?
The UK’s Accelerated Settlement Taskforce has recommended that the UK makes the transition no later than by the end of 2027, while Europe’s shift could follow a similar timeframe.
Both the UK’s taskforce and the European Securities and Markets Authority (ESMA) have stated that they look forward to engaging with one another to coordinate the move and ensure that the transition is efficient and cost effective, supporting a safe, resilient and integrated post-trade environment.
For the UK, this change is theoretically more straightforward as this is a single clearer region with a single legal framework to contend with. Europe, however, faces unique challenges.
With multiple jurisdictions, nearly 40 central securities depositories (CSDs) and myriad legal frameworks, even navigating all of the impacted markets may be a challenge, although organisations such as the Association for Financial Markets in Europe (AFME) continue to encourage cross-market collaboration.
Unlike North America, Europe requires instructions to be matched at the CSD prior to settlement, and participants face higher levels of cross-border settlement activity with counterparties often instructing in different CSDs. This is a layer of complexity that market participants are already starting to consider through work with industry bodies and ESMA.
In addition, European market participants are awaiting the final report from the ongoing Central Securities Depositories Regulation (CSDR) refit, which is expected to be published later this year or early 2025. This could see the introduction of a progressive penalty regime and possibly significantly increased penalties — albeit the latter impact seems to be scaling back from the initially proposed seven to ten-fold penalty increase, which is welcome news to many.
A parallel project to revise CSDR calculations and workflows resulting from a refit while preparing for T+1 in Europe will undoubtedly lead to additional stress on the industry.
Regardless of the scale and scope of the refit proposals, an ongoing CSDR regime in an accelerated settlement landscape adds a unique layer of complexity to planning, as increased cash reserve requirements for funding potential CSDR penalties compound the increased reserves needed for managing faster FXs for international activity.
Lessons learnt and the route forward
The successful change in North America has shown the importance of industry collaboration and communication in comfortably navigating such events.
Building on the foundation of insights gained through previous settlement cycle changes to use the best of what has worked before will also be necessary for further successful transitions.
Giving consideration to the October 2023 AFME report, ‘Improving the Settlement Efficiency Landscape in Europe’, three principal drivers of settlement inefficiencies have been identified for the market to consider: data quality, counterparty behaviour, and inventory management.
The importance of data quality in improving settlement efficiency is recognised across the industry and is an area of keen interest for me. This dates from my days leading a trade management function to my experience today where I see AccessFintech’s network participants hold themselves and each other to account to achieve high quality data standards.
Enforcing a comprehensive, agreed minimum data set across the trade lifecycle, combined with AccessFintech’s data normalisation which refines over 60,000 data attributes daily, has a clear and evidenceable impact on timely settlement and the eradication of manual effort.
Quality data from the outset, particularly in relation to trade economics including Standard Settlement Instructions (SSIs), PSET, and many more, enables organisations to ensure right-first-time matching and maximises timely settlement, mitigating the risk of CSDR penalties and moving the market towards a more normalised accelerated settlement cycle. In addition, clean settlement location information and a firm grasp of where positions are held directly reduce instances of delivery failure due to inventory issues, which often arise from holdings requiring movement from one depot to another.
A collegiate approach to enforcing good data standards by market participants themselves and growing market momentum towards data collaboration, which reduces the need for excessive query traffic, also lends itself to 'better counterparty behaviour' and intrinsic behavioural change.
The importance of industry dialogue and data collaboration
Industry dialogue and collaboration is the distinguishing factor that drives truly impactful change across the market. Only by working together will we collectively improve settlement efficiency and meet the challenges of T+1 changes to come. Improved data centralisation, normalisation and collaboration are foundational. By harnessing data in this way, optimised processes and real-time decision making will be unlocked.
AccessFintech has been and will continue to partner with firms globally to address this. Our Synergy Network connects executing brokers, prime brokers and custodians together with their clients to provide real-time data collaboration. This network now covers approximately 80 per cent of global market equity and fixed income trade activity.
Our services have helped organisations achieve fail rate reductions of up to 40 per cent and query traffic reductions of up to 90 per cent, freeing operational capacities and enabling proactive interventions to prevent trade fails within a shorter settlement timeframe.
Our AI capabilities continue to grow as we look to roll out our Predicted to Fail Probability feature which will enable firms to automate repairs based on our published insights. This innovation promises to further drive settlement efficiency by increasing automation, releasing capacity and minimising risk.
As the industry heads to the beach this summer, we can all take a bit of pride in the role we played in supporting North America’s transition to T+1. When we return, rested and revitalised, we should be ready to prepare for the next round of changes.
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