In a quest to reach more efficient securities settlement, buy- and sell-side firms face immense pressure to update their systems and remove expensive manual processes. These forces are exacerbated for European firms with the Central Securities Depositories Regulation (CSDR) penalty regime, which has imposed penalties of over two million euros per month for some settlement failures. With T+1 on the horizon, join Kamal Kannan, Director, S&P Global Market Intelligence, for a closer look at why firms should be systems and process ready to face the regulatory change.

By Kamal Kannan

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PostTrade 360 Nordic 2024

The North American markets’ proposals to move towards a shorter settlement cycle are adding fuel to the fire. Other markets are already on a shorter cycle, such as India, which has already moved to T+1 on a phased approach, starting with its most illiquid instruments, while Hong Kong and China are settling cash equities on T+1/T+0 already. 

In a post-Brexit bid to be more competitive, the United Kingdom has launched a task force that will observe the case for trades to be settled more quickly (T+1). Europe will be facing the move sooner rather than later, with industry experts having already started their analysis into the mechanics of the shorter settlement cycle and how this move would benefit and impact the European market.

Alarming numbers on the settlement failures:
• For every 100 securities transactions sent for settlement, five will not be completed on the expected settlement date. 
• An average of 7% to 8% of equity settlements and 2% to 4% of bond trades fail.
• Data issues are directly causing between 3% to 35% fails.

Further amendments to CSDR considering continued high-level settlement failures across Europe could include:
• Increase in overall penalty basis points. 
• Public disgrace/exclusion from depositories in case of repeatable fails. 
• Amendments to article 5.2 (shorter settlement cycle), 2 (same day allocation/confirmation), 10 (partial settlement), and 11.4 (additional facilities and information) should there be an adoption towards a shorter settlement cycle.

Proposed amendments to SWIFT messaging to detect and manage settlement discrepancies proactively are:
• Adoption of the Legal Entity Identifier (LEI), Unique Transaction Identifier (UTI), Unique Product Identifier (UPI), and Critical Data Elements (CDE) within SWIFT standards.
• Industry-wide adoption of a unique transaction identifier (UTI) 5 that would allow market participants to track securities transactions from end to end throughout a trade’s lifecycle and help reduce the number of matching & settlement fails by 90%.

Considering the above points, one can conclude that it is the right time to act now and adopting a robust and scalable operating model for post-trade settlement is necessary. Embracing an effective target operating model will enable firms to gain maximum efficiency in post-trade settlement. 

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S&P Global Market Intelligence and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Consult your own tax, legal, or accounting advisors before engaging in any transaction.