With the US set to accelerate settlement times in May 2024 and other jurisdictions expected to follow suit in the long-term, addressing wider issues around settlement inefficiencies has come to the forefront, according to a new report from AFME.
In the report, which was conducted by AFME and Deloitte, the firms analyse the cause of settlement fails in the EU securities market alongside providing recommendations to improve the efficiency of post-trade processes, highlighting that addressing inefficiencies could help prepare for potential shifts to T+1 in other jurisdictions.
Europe was found to have lower settlement efficiency than other regions, though AFME highlighted that it was difficult to make a direct comparison due to significant differences in market structure, processes and standards.
The introduction of the Central Securities Depositories Regulation (CSDR) cash penalties was notably helpful in reducing settlement failures, in particular for equities, said the report. However, settlement inefficiencies remain, leading to increased costs and risks for market participants.
AFME highlighted that an improvement in data quality and standards throughout the lifecycle, in addition to the provision of more granular CSD-level data, would be critical to for the industry to identify issues and construct solutions.
“Although there is some evidence that the Central Securities Depositories Regulation (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,” said Pete Tomlinson, director of post-trade at AFME.
“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.”
Among the recommendations provided by AFME, is a reduction in exemptions. The association recommends that all necessary information needed for settlement should be provided on trade date, supported by a regulatory requirement to have allocation and confirmation processes completed on trade data.
AFME recommended that firms ensure that their settlement holiday calendar is in alignment with CSDs, highlighting any potential conflicts that could result in cross-border settlement fails.
Internal processing logic should also be reviewed comprehensively to ensure economic trade data such as SSIs are up-to-date and industry SSI repositories are leveraged where possible.
AFME also recommends expediting exception resolutions, including assessing the possible adoption of a unique transaction identifier (UTI) for use in post-trade processes, as well as addressing existing gaps and inconsistencies in market standards.
Firms and providers were also recommended to establish consistent criteria and tolerances between pre-settlement matching and CSD-level matching, as well as consistent thresholds and static data throughout the chain.
Elsewhere, AFME recommended optimising settlement of available inventory including CSDs offering auto-partial settlement and hold with partial release, with intermediaries to facilitate and encourage the use of auto-partial/partial release by end users.
Increasing the frequency of settlement batches by CSDs or the adoption of real-time settlement was also recommended, with enhanced harmonisation to support cross-border settlement.