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The Bank of England Money Markets Committee has highlighted high rates of settlement failure prevailing for securities finance trades.
Results from an informal market survey conducted across ISLA members for securities lending transactions between 2019 and October 2022 found that for closing leg trades, settlement rates were generally around 85 per cent for both equities and fixed income loans.
The Committee reported that the settlement discipline regime component of the Central Securities Depositories Regulation, implemented in February 2022, has had some positive impact on these settlement fail rates, pushing settlement rates up to 90 per cent for return leg trades for equities loans.
For open leg trades, settlement rates were typically higher, falling in the 95 to 97 per cent range for equities and fixed income transactions.
For equities loans, the survey finds that the primary reason for settlement fails in the return leg was typically lack of access to stock. For fixed income lending, the primary driver was lack of liquidity in the corporate bonds market.
These concerns about settlement efficiency also extended over into the repo marketplace.
Notwithstanding a rise in settlement efficiency between May and September 2022, there was a tangible rise in fail rates over the last fortnight of September and into October linked to the rise in gilt repo volumes around the time of the UK mini-budget and the resultant surge in market volatility.
These findings were discussed at the MMC’s most recent meeting, held on 12 October. The minutes of this meeting were published yesterday.
Since the last MMC meeting, Euroclear has taken some steps to address these concerns, including an extension of the DvP settlement window and the release of its autosplitting facility to support partial settlement in November 2022.
Concerns around excessive settlement fail rates in securities finance markets were discussed in more detail in a panel at the International Securities Lending Association (ISLA) post-trade conference in London on 1 November 2022, alongside inefficiencies currently prevailing in know-your-customer validation processes and client onboarding.
