As the US inches closer to its implementation of a T+1 settlement cycle on May 28, 2024, the UK and EU are also exploring the case for accelerating settlement cycles in their markets to achieve greater industry harmonization and other benefits including reduced risk, lowered clearing fund requirements, operational efficiency and improved capital and liquidity utilization.
Related: Affirmation Progress as T+1 Draws Near
It is important to note that a successful transition to a T+1 settlement cycle in the UK and EU will require an increase to the current levels of post-trade automation. The Association for Financial Markets in Europe (AFME) published a whitepaper in Q4 2023 that highlighted pain points in current securities processing in the region, such as data quality issues and counterparty behaviors that affect the ability to match and allocate trades, and recommendations on how these obstacles could be removed. T+1 therefore provides an opportunity to enhance operational efficiencies by encouraging market participants to automate manual processes and adopt industry standards and best practices.
Automating Post-Trade Processes
Specifically, trade matching is a critical part of the post-trade lifecycle and serves as the first safety check after execution has taken place. When the buyer and seller agree on all the details of their transaction, a trade match occurs, and the settlement process begins. Most importantly, trade matching allows counterparties to identify exceptions that may cause the transaction to fail. The sooner firms can move to settlement and address trade fails, the better the chances of meeting an accelerated settlement timeline. In support of this, we recommend that the UK and EU markets consider mandating that trade confirmation, allocation and matching take place on trade date, allowing for T+1 settlement.
Standing settlement instructions (SSIs) are another critical component of the post-trade lifecycle, as they play a key role in preventing trade fails. Manual SSIs and the absence of storing and sharing SSI data in a standard and automated fashion across the industry introduces risks and inefficiencies into the post-trade process. In fact, it has been observed that inaccurate or incomplete SSIs are often a primary reason for trade failures. Accurate, automated SSIs are key to the facilitation of accelerated settlement.
“Post-trade automation and standardization can increase settlement efficiency, paving the way for T+1.”
To address both areas - trade matching and SSIs - firms should evaluate best practice solutions that automate and improve post-trade processes. Today, automated central matching platforms enriched with golden source SSI data and workflows that facilitate accelerated settlement already exist and are key to achieving greater settlement efficiency.
According to DTCC’s internal data most transactions leveraging an automated central matching platform are matched and agreed on execution date. On average, over 90% of all EMEA cash securities transactions that utilize automation are fully allocated and matched on execution date. At the same time, leveraging a central SSI repository can provide increased transparency and automation while significantly reducing trade failure. This is because all respective market participants seed the SSI data, access the SSI data and enrich the data from a single source, in an automated fashion.
The Need for Standardization
In addition to the automation opportunities, the lack of standardization in post-trade processing should also be an area of focus in the UK and EU. Currently, there is no uniform identification reference added to transactions that persists throughout a transaction lifecycle. Securities markets should look to how derivatives markets solved this problem with the introduction of Unique Transaction Identifiers (UTIs) for trade reporting purposes. The UTI allows transaction identification to happen near instantaneously and creates greater visibility across the transaction chain. This enables quicker identification and resolution of bottlenecks or settlement lifecycle issues, while reducing operational risks and costs arising from potential settlement fails. The introduction and increased use of standards, such as the UTI, supports the facilitation of accelerated settlement cycles globally.
Understandably, settlement inefficiencies and risk receive a significant amount of attention from financial market infrastructures and regulators. Considering current levels of interest rates globally, the cost of settlement failure has also increased and has a significant impact on client processing from a risk, funding and even balance sheet perspective.
Introducing greater levels of post-trade automation and standardization can increase settlement efficiency, paving the way for accelerated settlement and reduced risk across the region while modernizing and advancing the industry’s capabilities. There is no better time than today to advance these conversations.
This article was originally published to Views The Eurofi Magazine on February 21, 2024.