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The European Central Securities Depositories Association (ECSDA) Settlement Working Group has released a discussion paper outlining what it has found to be the root causes of settlement fails in Europe.
The paper, entitled ‘Settlement efficiency considerations’, has been published a year and a half after the implementation of the Settlement Discipline Regime.
ECSDA’s report includes preliminary analysis on the topic from a central securities depository (CSD) level, along with recommendations to improve efficiency in Europe without reducing the volume and value of transactions to be settled.
While CSDs aim to improve settlement efficiency, as fails can result in undue costs, transaction friction and, ultimately, systemic risk, ECSDA states that allowing for a lower level of fails is “preferable” to full settlement efficiency.
The paper explains that the latter could result in an “unreasonable level of rigidity” in financial markets, along with high costs for pre-funding and technology upgrades. “A certain level of tolerance is instrumental to the well-functioning financial markets aspiring for high levels of liquidity and settlement velocity,” it affirms.
The report concludes that a lack of securities remains the main reason for settlement fails, however ‘on hold’ instructions, a lack of matching instructions and late matching are also cited as considerable factors. Additionally, structural, national and market specifics can play a part in settlement rates, something which the paper affirms “can hardly be influenced by CSDs or their participants”.
To reduce fails, ECSDA suggests a greater use of the tools offered by CSDs when available, such as partial settlement and particle release capabilities, and recommends that CSDs consider making further service tools available to clients.
Additionally, CSDs should engage with market stakeholders in order to assess settlement efficiency data.
The majority of ECSDA’s recommendations are around CSD activities. However it notes that “improvement may also be largely achieved by intervening at other levels”, improving end-to-end processing efficiency and increasing the use of automation from trading to settlement.
