The question arises as to whether settlement efficiency is being measured correctly. Different methodologies can produce different results, which could have a significant impact on informing policy decisions taken by public authorities.
The settlement efficiency rate – or the proportion of transactions which are completed on their contractually agreed settlement date – has become a topic of intense scrutiny for regulators and market participants in the European securities post-trade industry. The current default settlement period for most transactions stands at two days, or “T+2”. Measuring settlement efficiency is critical to answering other important post-trade-related questions that policymakers are currently weighing up. For example, whether changes to the Central Securities Depository Regulation (CSDR) Settlement Discipline rules are required. ESMA has recently consulted on potential changes to the cash penalties charged for settlement fails, including proposals to significantly increase the daily rate. Although mandatory buy-in proposals are currently off the table, they will only remain so if regulators are satisfied that levels of settlement fails do not pose any financial stability risk.
Settlement efficiency is also closely intertwined with the current T+1 debate. It will be important to understand whether moving to T+1 will reduce settlement efficiency, and if so, by how much. A substantial increase in fails would mean the risk reduction benefits of T+1 are not fully realised.
The question, however, arises as to whether settlement efficiency is being measured correctly. Different methodologies can produce different results, which could have a significant impact on informing policy decisions taken by public authorities.
There are several dimensions to consider:
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Firstly, should settlement efficiency be measured by volume (i.e. based on the number of instructions that fail to settle) or value (i.e. based on the market value of the failing instructions)? In other words, should more importance be attached to one fail worth 100mn EUR, or ten fails each worth 1,000 EUR? If we are primarily thinking about the systemic risk impact, it seems intuitive to focus on value.
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Secondly, what type of activity should be included when assessing risk? Numerous instructions processed by CSDs do not necessarily relate to a “trade”. For example, collateral transfers, portfolio realignments, corporate actions, and other types of CSD-generated movements. Are these other types of settlements as important or relevant when assessing levels of risk?
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Another interesting question centres on how a multi-day settlement fail should be recorded. Should it be counted only once, on the first business day that the instruction fails or rather recounted as a fail on each business day that it misses settlement? ...
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