An old saying states that nothing good ever happens between execution and settlement. The truth is that there is a reduced chance of trade failure if you lock in your trade with your counterparty as quickly as possible. Recent analysis that we have conducted with Global Custodian magazine shows that should the details of a trade be verified on the same day that it is executed (Same Day Affirmation), it will have a much higher chance of settling on time and be much less likely to fail. This can be most clearly demonstrated by examining settlement performance in markets where levels of Same Day Affirmation are high. Countries with SDA rates of over 90 per cent (India, Taiwan, Hong Kong, Japan, Singapore and Korea) consistently collect the most impressive settlement efficiency scores; countries with SDA rates of less than 70 percent (Brazil, Italy, South Africa and the United States) consistently collect below-average settlement efficiency scores. Moreover, settlement efficiency is 26% higher for the top countries by SDA rate, than the lowest countries.
In terms of regional levels of SDA, Asian markets are the most efficient. Asia displays the highest SDA rates (94 percent regional average) and the Americas the lowest (53.8 percent average). In Asia, India, Taiwan, Hong Kong, Singapore and Korea lead the way with SDA rates over 90 percent. In the Americas, the United States has the second lowest SDA rate with 46.9 percent, after Argentina, while Canada has the highest. In Europe, SDA rates are consistently in the mid 80 percent range, with Switzerland scoring highest with a 87.6 percent SDA rate, and Italy the lowest with 68.4 percent.
The issue of timely trade affirmation and settlement efficiency is even more pertinent in Europe given the proposed implementation of a uniform, pan-European settlement system called Target2 Securities (T2S) planned for 2014 and led by the European Central Bank (ECB) which will force the debate over harmonization of settlement cycles across Europe. Currently, Germany settles two days following trade execution (T+2) whereas the rest of Europe settles three days after trade execution (T+3). To live up to its mandate, T2S would benefit from one, harmonized settlement cycle across Europe and the majority thinking is that that should be T+2. This trend is receiving further impetus from the French legislative process to mandate T+2 during 2012.
In a T+2 environment, SDA is critical because it accelerates the post-trade process and leaves enough time to identify and address any errors and mismatches before trades are due to settle. Further, shorter settlement cycles increase SDA and settlement efficiency. In our research, four of the five countries that display the highest SDA rates and settlement efficiency rates require T+2 settlement for most securities. These include India, Taiwan, Hong Kong and Korea. Similarly, South Africa, which has one of the lowest SDA rates and settlement efficiency scores, operates on a T+5 cycle.
This recent analysis proves beyond doubt that there is a direct relationship between Same Day Affirmation and settlement certainty. For any market considering reduced settlement times and settlement certainty, same day affirmation is an essential prerequisite.