The Association for Financial Markets in Europe (AFME) has published recommendations for partial settlement, a concept it believes can reduce fails in light of the incoming Central Securities Depository Regulation (CSDR).
The trade body is trying to raise awareness of the practice, which central securities depositories are required to offer under the regulation.
CSDs will allow participants to place settlement instructions on hold, the association explained, at which point they will undergo matching but will not be eligible for settlement until they are released.
AFME’s recommendations fall under three areas: partial hold and release, auto-partial settlement and manual partials.
Under partial hold and release, CSDs will allow participants to place settlement instructions on hold. They will undergo matching but will not be eligible for settlement until they are released. Where settlement of a delivery instruction takes place though an omnibus account structure, said AFME, partial hold and release will allow for maximised settlement opportunity without increasing the risk of pilferage in cases where the full quantity of securities it not available at that time.
Under auto-partial settlement, CSDs will run this processes throughout the day, whereby available positions will be automatically settled, to ensure settlement performance is maximised.
Finally, a manual partial is where two parties bilaterally agree to manually cancel and reinstruct an outstanding settlement fail in smaller shapes, to enable settlement of an available position.
“The increased adoption of partial settlement is one example of how the industry can improve settlement efficiency,” said Stephen Burton, managing director, post-trade at AFME. “Particularly, at a time when the mandatory buy-in regime under CSDR is due to be implemented later this year, improving settlement rates will help to mitigate the possible negative impacts, including reduced liquidity and greater volatility, when investing in European securities.”
The incoming rules are set to take hold on 1 February 2021 and introduces cash penalties for late matching and failed settlements, and a mandatory buy-in procedure.
AFME said it is aiming to help buy-side clients, brokers and service providers such as intermediaries, central counterparties, custodians, banks, and local agents with its recommendations which can be found here.