Equity settlement fails remain high in 2021

Equity settlement fails remained more frequent than before the Covid-19 crisis and slightly above the second half of 2020 levels across asset classes, according to the European Securities Market Authority Association’s 2022 Trends, Risks and Vulnerabilities (TRV) Report.

The report looked at the share of failed settlement instructions in the European Economic Area 30 in percentage of value, one-week moving averages. It showed that fails climbed to around 14% for equities and close to 6% for government and corporate bonds at the height of the volatility in March 2020.

Meanwhile, April last year marked the peak for 2021 at 11%.

The spotlight has been turned sharply on settlement fails with the implementation of the Settlement Discipline Regime of the Central Securities Depositary Regulation (CSDR) on 1 February.

This requires impacted European central securities depository (CSDs) to automatically apply financial penalties to market participants that fail to complete transactions on the contractual settlement date and subsequently report those failed trades.

“The challenge is daily penalties imposed by the CSD vary by the type of financial instrument transacted, with different penalty rates applying to highlight liquid markets which should mean they are traded more easily,” says Philip Flood, business development director for regulatory and STP services at Gresham Technologies:

He adds, “Penalties could increase dramatically each day depending on the trade in question and settlement processes should group and order failures by taking into account the potential penalty risk from CSDR.”

Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company.

Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company, notes. “These latest findings from ESMA reinforce why reducing settlement fails must be a primary goal for all market participants.”

He says, “Huge strides have been made as banks prepared for the CSDR penalty regime introduced earlier this month, but this is only one part of the story. What’s needed is a better understanding of when, why and with which counterparties trades are failing to settle.

All the relevant data from across the organisation needs to be centralised and accessible to enable any meaningful analysis of fails. Only then can banks take steps to address the operational inefficiencies and counterparty relationships that are impacting their profitability and, in so doing, reduce their overall fail rates.”

©Markets Media Europe 2022

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