Banks and asset managers will soon be grappling with a revolution in European securities markets that could push up the cost of trading by billions a year.
New European rules are due to come into effect in September that will impose tougher standards on trades that fail to settle on time — either because the buyer does not deliver the funds to pay for the deal, or because the seller does not supply the securities. The rules are expected to shake up an industry that is used to resolving such problems on an informal basis, and where late penalties are rare.
Like its regulatory cousin MiFID II, the new failed-trades regime was formed in response to the global market crash of 2008. Policymakers hope to reduce uncertainty among investors that a default would mean they may not receive the goods they had paid for — and to reduce the risk of those unsettled trades ricocheting through the market. But failures are as likely to be caused by tech glitches or paperwork problems as a default, say market participants, and a few phone calls normally smooth over most wrinkles. Now that system is being taken away. Trades that fail to settle, usually within a window of two or three days, will undergo a mandatory “buy-in” to close the deal. The counterparty, clearing house or central securities depository will be required to buy the asset at the prevailing market price and then deliver it to the non-defaulting party within seven working days.
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