The European Central Securities Depositories Association (ECSDA) recently published a discussion paper on settlement fails in Europe, a year and a half after the implementation of the Settlement Discipline Regime (SDR). Although the report was meant as a preliminary analysis of the root causes of settlement fails in the region, and a sharing of recommendations for improving settlement efficiency, ECSDA clarified that its intention is not to aspire to full efficiency, but simply a lower level of fails.
Full efficiency might lead to “an unreasonable level of rigidity in financial markets and result in high costs”, wrote ECSDA. In comparison, “a certain level of tolerance is instrumental to the well-functioning financial markets aspiring for high levels of liquidity and settlement velocity”.
Sense of security
According to the CSDs that took part in ECSDA’s survey, the three most common reasons for settlement fails are a lack of securities, on-hold instructions (which are often linked to the lack of securities), and late matching.
ECSDA also acknowledged that some factors that impact settlement are structural or due to national market practices, and “can hardly be influenced by CSDs or their participants”. Time zone differences is one example. Another such factor is asset protection laws that do not allow assets to be released until they are available as part of the registration process, and which require settlement instructions to be put on hold until the securities are available.
The right tools
To reduce settlement fails, ECSDA recommended the use of available tools, such as H&R, partial settlement, and partial release. CSDs should also consider fine tuning available tools, or implementing new ones that could improve settlement efficiency – one example is the intention among European economic area (EEA) CSDs to make improvements to the transparency of partial settlement. Cooperation with market stakeholders is also important; CSDs “may consider predictive analytics, artificial intelligence and other modern technologies that might aim at higher efficiency”.
ECSDA suggested that CSDs should keep analysing the reasons for fails in order to keep pace with necessary improvements. The paper concluded that “the best result will be achieved through a transparent collaboration among all the operators involved in the settlement process, to continuously identify pain points, solutions or mitigating actions”.
