By Bill Meenaghan, Regional Product Manager, Omgeo ALERT
Harmonization of Europe’s settlement cycle to two days after trade date (T+2) has long been discussed together with what market participants need to do to ensure its smooth implementation. With a month to go before the first phase of implementation, where trades conducted on or after October 6 will be settled on a T+2 basis, market participants are getting ready.
The problem created by a shortened settlement cycle is that market participants will lose a full day from their current post-trade process, which will undoubtedly cause an increase in trade failures and related issues. One of the main reasons for failed trades is inaccurate data in the standing settlement instruction (SSI) or simply, the wrong SSI being used/assigned.
SSIs are a critical component of trade details, and are a necessary data element to ensure timely settlement, as they include information such as account number, place of settlement, security type and BIC code. Global custodians, as a source of SSI data, can play a significant role in helping the buy side to efficiently manage this data and therefore to comply with the impending T+2 deadline.
In an Omgeo survey of custodian banks worldwide conducted in 2012, nearly 40% of respondents cited that around one-third of their clients’ failed or amended trades were due to SSI issues. Respondents identified manual or missing SSI data as the main problems. The banks also highlighted that they primarily used manual methods to share their SSIs with their investment management clients, including email which was cited as the most common method of sharing/updating their SSI data. SSIs are so important to the settlement cycle that 60% of respondents to the survey believe the need to submit trade details in a more timely fashion requires the most attention in terms of readiness for shorter settlement cycles.
Today, the flow of SSI data from a global custodian to the executing broker is via a buy-side client. While many investment managers add their SSI data into a central database to allow the brokers to access them electronically, a high percentage of them do not. In such instances, an avalanche of manual work is created for executing brokers as they receive this data individually from investment managers in many different formats and are required to enter it in their internal SSI database systems, therefore creating operational risk due to the manual nature of the process.
For many years, the buy-side and custodians have persistently argued over who should take responsibility for the accuracy of SSI data and who owns the data. With shortened settlement cycles approaching, this debate has become more relevant than ever as the need for accurate and timely SSIs is at an all-time high. Due to significant advances in technology, which have enabled tighter audit and messaging controls, custodians are now willing to take responsibility for providing accurate SSIs in an automated fashion to the buy side. This evolving role of custodians will also mean that executing brokers can benefit from the standardization of SSI formats.
In short, the new initiative will not only remove the headache of manual processing of SSIs for the buy side, but more widely it will help the industry to meet the demands of T+2. After a long debate about how best to solve the problem of SSIs and who should take responsibility, the regulatory imperative of T+2 has finally helped to drive a suitable industry solution, which will benefit both the buy side and sell side.