It has been over a year since the implementation of the Settlement Discipline Regime (SDR) of the Central Securities Depository Regulation (CSDR), and the industry is still adjusting. Recent outputs from regulators and the Bank of England have shown a concerning trend with settlement fails and delays persisting.
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SDR was implemented in February 2022 to improve settlement efficiency across cash securities products in Europe, with firms facing settlement penalties for trades that fail to settle on time. Earlier this year, the Bank of England flagged that late settlement fines have been larger than anticipated in Europe, which could potentially be due to the structural complexities that exist within the region, such as multiple central securities depositories and more currencies. In any case, the penalties have been a significant challenge for firms, especially those who were not well prepared for the regulation.
To avoid issues in global post-trade operations moving forward and as organizations turn their focus to T+1, it is vital firms learn from their CSDR implementation challenges. Preparations for T+1 implementation in the U.S. continue, with the Securities and Exchange Commission (SEC) having announced an implementation date of 28 May 2024. With a date now set, it is critical that firms assess the impact of a shorter settlement cycle across their operations to promote compliance, while looking closely at the drivers of settlement fails and delays.
The Driving Factors
The factors driving settlement fails and delays are not surprising, as they remain consistent to warnings long before SDR was implemented in February 2022. These drivers include:
- Gaps in standing settlement instruction data: incomplete or inaccurate information: if there is missing or incorrect information about the trade, such as the price, quantity, or settlement date, there will likely be a delay to settlement
- Operational inefficiencies: operational errors, such as delays in the confirmation or matching process, or problems with the trade processing systems which affect settlement
- Counterparty risk: if one of the parties involved in the trade fails to fulfil their obligations, such as delivering the securities or providing the funds, timely settlement will be affected
- Legal and regulatory barriers: restrictions on cross-border settlement or issues with compliance with CSDR rules, for example, will impact settlement
- Market volatility: in times of market stress or high trading volumes, settlement fails can occur due to increased operational challenges or difficulties in managing increasing volumes
It is important to note that settlement fails can often be the result of a combination of these factors, but it is clear they can have significant consequences for firms in the face of CSDR and other looming regulation, such as upcoming implementation of T+1 in the U.S.
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On the Horizon
Unquestionably, the industry must make changes to make the post-trade process more efficient and prevent settlement fails. Implementation of further automation in this area, will create positive downstream effects, helping to increase efficiency and enable timely settlement. Market participants who are slow to automate will cause issues for the rest of the market – the system is only as strong as its weakest link and those yet to adopt post trade automation can create a domino effect slowing everyone else down. This lack of automation can impact a wide network of counterparties who rely on each other for transactions to flow seamlessly to settlement.
With the U.S. move to T+1 becoming a significant priority over the next 12 months, it is important that the lessons learned from SDR are addressed and that automated solutions, such as central matching services with SSI enrichment, are adopted. Doing so will ensure that back-office teams do not become overstretched and underequipped to deal with this change, putting the organization in the best position to meet regulatory demands while increasing efficiency and reducing risk for the industry.
This article was first published in Funds Europe on 24 April 2023.