As debates on key CSDR Settlement Discipline issues remain unresolved and the expectations of the delay come closer to realisation, the industry understandably remains in a state of flux. However, regardless of precisely what happens with the timing of the regulation, it is now the time to get more disciplined about settlements, which is strengthened further by the latest ESMA Trends Risks and Vulnerabilities (TVR) report.
The study shows a dramatic surge in the level of settlement fails during the second half of March. According to the report, fails climbed to around 14% for equities and close to 6% for government and corporate bonds.
Although, one can argue that COVID-19 induced volatility and adaptations to work environments have driven, what the study states to be, the most significant rise in European trade settlement fails since 2014. The truth, however, is that these numbers put into sharp focus the longstanding operational and structural issues that have hung over trade settlement processes like a dark cloud for far too long now.
Identifying and remediating the root cause of any settlement delay or failure in time to avoid CSDR consequences wastes on average 4-6 hours of capacity. Market participants, therefore, need to shift their attention away from how to deal with trade fails, towards pre-emptively reducing the number of transactions that are failing to settle through internal efficiency improvement and collaborative approaches.
Achieving the above objective is by no means a straightforward task, as most financial institutions still operate with an inherited legacy technology architecture and highly complex operating models.
Firms should explore solutions that could address the issue of settlement fails that do not require wholesale changes to their existing architecture at unmanageable costs.
In the post CSDR era, every hour will matter when it comes to settlement efficiency, as the luxury of ‘another day’ to resolve a failing trade will not be possible. Increasing the control organisations have over their trade lifecycles and identifying settlement delay or potential failure warning signs on T+0 will give participants a considerable advantage. Detecting and being alerted to transaction event anomalies in real-time will provide impacted teams valuable time to prevent failures before CSDR consequences materialise.
Improving the discipline around internal settlement processes and encouraging counterparts to follow suit through collaboration, incentives or slaps on the wrist where relevant, is where we see the market trending.
Whether the European Commission confirms the delay of CSDR or not, it will be irrelevant as long as the industry conforms to find a solution to ensure penalties and buy-ins do not occur in the first place.
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