In the wake of the go-live of CSDR settlement discipline, the ERCC is releasing this discussion paper to focus attention on a number of key opportunities to strengthen settlement efficiency in Europe, which are complementary to the CSDR measures. While ICMA and the ERCC have been supportive of cash penalties, we believe that these should be supplemented by a broader industry effort to support settlement efficiency, focusing on existing tools and processes. In early 2021, the ERCC, led by the ERCC Operations Group, initiated some detailed work to look at the current state of settlement efficiency in European fixed income markets and to identify related opportunities. A number of key issues have been identified and explored further with members in a series of cross-industry workshops. This paper recaps the key take aways from the discussions.
The first part of this paper (chapter 2) focuses on the current state of settlement efficiency in Europe, relying primarily on helpful analysis undertaken by the Eurosystem and the CSDs that form part of TARGET2-Securities (T2S). The analysis indicates that the level of settlement efficiency is already relatively high, especially for fixed income transactions (whether cash trades or repo). However, the figures also show that there is still room for improvement, in particular in times of market stress. Building on these insights the second part of the paper (chapter 3) focuses on the key opportunities identified by ERCC members to help close the gap. More specifically, the focus is on three tools: (i) the shaping of settlement instructions, (ii) partial settlement and auto-partialling and (iii) automatic borrowing and lending programmes offered by a number of (I)CSDs. All three tools, used to their full potential, are considered crucial to help the industry to further reduce settlement fails, mitigate their economic impacts and support market liquidity. The paper also discusses some further opportunities in relation to data, transparency and automation more broadly.
In terms of next steps, an important focus will be on industry best practice. All the opportunities discussed in this paper are already covered to some degree in existing best practices, in particular the ERCC Guide to Best Practice in the European Repo Market. Ensuring that these are followed consistently by all market participants would mark a major step forward. In order to reinforce the message, the ERCC has published, along with this paper, a compilation of existing best practice recommendations, which have been endorsed by the ERCC Committee to show the commitment by member firms to duly follow these best practices for the benefit of the wider market. The issues addressed in this paper go beyond the ERCC and the repo market. Broader discussion and agreement will thus be needed. The intention of this paper is to serve as a starting point for such discussions and the ERCC will pro-actively engage with other industry stakeholders. We are also keen to continue the constructive dialogue with central banks and regulators on settlement discipline, to help achieve a more efficient post-trade environment without having to resort to more extreme measures such as mandatory buy-ins with the associated risks for the liquidity and stability of financial markets.