Settlement failures have cost the industry at least 914.7 billion dollars in penalties and resolution measures over the last decade, a recently published report by Firebrand Research revealed. “The lack of efficiency within the post-trade lifecycle has come into greater focus”, wrote the report, due to the industry’s current focus on the shortening of the settlement cycle in certain jurisdictions.

Gathering insights from buy- and sell-side firms as well as market infrastructures, the study identified five core areas of concern that the industry should address: the unpredictability of costs, unsustainable spending, a lack of consistent global market practices, the lack of time before May to address inefficiencies, and the continued regulatory pressure.

Work to be done

The report named coping with the impact of market volatility on operational costs as “one of the greatest challenges for operations heads over recent years”. Higher volumes have led to more settlement failures, which in turned, led to increased costs and greater risks. Spending has become unsustainable with “much more spent during the last four years due to volatile market conditions”. According to Firebrand’s research, settlement failures cost the industry US$161.63 billion in 2021, during the peak of market volatility.

PostTrade 360 Nordic 2024

Compounding the issue is the lack of consistent global market practices. The report pointed out that “the industry doesn’t have a standard means of measuring settlement efficiency and the global industry costs related to failed settlements have long been a challenge to estimate”. Unfortunately, these inefficiencies are unlikely to be resolved before the tight May deadline for T+1 in the North American markets, as it might require “full-blown legacy replacement projects” for many firms.

For the organisations in which an overhaul of legacy systems cannot be achieved in the short-term, Virginie O’Shea, founder and CEO of Firebrand Research, suggests, “In the meantime, firms can invest in various supporting solutions to improve communication efficiency, adopt standards such as the unique transaction identifier (UTI) and services offered by market infrastructures to reduce the impact of failures.”