A recent report from Firebrand Research claims that industry-wide issues have resulted in $914.7bn in the form of regulatory penalties and resolution measures over the course of a decade. As the capital markets industry focuses on shortening the settlement cycle in key jurisdictions across the globe, the lack of efficiency within the post-trade lifecycle has come into greater focus.
“The industry has lacked tangible statistics within this realm. To address this data gap, Firebrand Research has worked with a range of key market participants, including buy-side firms, sell-side firms and market infrastructures to collate the first-of-its-kind benchmark data on the true cost of settlement inefficiency,” according to a statement published by Mondo Visione.
James Pike, head of Business Development at Taskize, said in a statement: “The DTCC testing appears to show the market is well-placed for the implementation of T+1 with 100 days to go. However, a spike in trade settlement fails under T+1, which could be triggered by a sudden increase in volatility in US equity and fixed income markets, will see trade fails and associated costs increase.
“The market should be preparing far more actively and looking to implement solutions to enable accelerated matching, improved exception handling to drive the management and prevention of fails and the preservation of the existing performance levels at a minimum.
“For example, the manual routing of exceptions remains far too prevalent and will not be scalable to handle a jump in trade failures. Non-US based market participants also need to implement the ability to ‘pass the book’ internally to other operations teams so issues don’t persist beyond the end of the trading day. These are two areas of the securities settlement picture that need to be looked at much closer with the time remaining to make sure settlement fails costs don’t increase further.”
Daniel Carpenter, CEO of Meritsoft, a Cognizant company, said in emailed commentary: “The costs of settlement fails cannot be swept under the rug any longer. As is widely anticipated, the number of fails will balloon even further under T+1. While the US doesn’t have a scheme imposing penalties for failed trades, as Europe has with CSDR, the cost of interest claims for failed trades acts as a penalty in all but name.
“This is especially painful as the amount of interest billed is linked to interest rates which are at their highest for over a decade and expected to remain elevated. Anyone looking to manage their fails and associated interest claims with workaround solutions after 28th of May is going to be in for a rude awakening.
“Banks need to be able to track the settlement process from matching to settlement in pretty much real time ensuring they not only identify breaks but allocate accountability and accrue costs. Being able to prioritise a trade about to fail based on the value of the trade and all associated costs can help to save banks millions of dollars annually in post trade costs and improve trade profitability.”