Same day affirmation rates in non-equities market are still worryingly low despite the emergence of electronic trade confirmation platforms in the last decade, a new whitepaper argues.
The whitepaper from Trax, a provider of capital market data, trade matching and regulatory reporting services to the global securities market, says that in these markets, particularly cash fixed income, firms still failing to achieve high rates of trade confirmation.
It believes the move towards T+2 in Europe will be a strong catalyst for change. Exchange of settlement Instruction data should be seen as an essential part of the confirmation process, it says, not left to exception management on T+1 or even later. The operational risk and the associated impact on reputation, as well as pocket, for failed trades means that doing nothing to prepare for T+2 is not an option.
While in equities there are largely same day affirmation rates, Trax’s head of post trade Chris Smith notes that in cash fixed income only 50% of broker-dealer transactions are confirmed on trade date. “The impact is that you have exception management processing on T+1 and T+2 to be ready for T+3. One and a half to 2% of trades fail on T+3 because the bonds are not at the right place because parties thought the settlement might be taking place in an ICSD whereas they’re still sitting in the domestic CSD.
“There needs to be an agreement of trade details within a few minutes of execution and that is not being done. Therefore there has been a constant failing of trades and that costs a lot of money.”
This change to T+2 will impact the whole market. The European Commission’s Central Securities Depositories Regulation (CSDR) is only for on-exchange trades but the market convention will be that this becomes the default for OTC trades. Transactions with clients or counterparties outside Europe will also be settled on T+2. There is no single co-ordinating body, and markets and their supporting infrastructures have changed significantly since settlement cycles were reduced to T+3.
In the absence of regulation to drive the need for same day affirmation, the whitepaper says the answer may lay in the costs and operational risks of running unconfirmed trades. “There are T+3 buy-ins and funding costs and there is also a risk of having interest rate claims against you by counterparties. In T+2 the amount of failed trades may go up but the reason we are moving to T+2 is that the implementation of TARGET2-Securities and CSD regulation brings through more rules for the implementation of fines for failed trades. So instead of a CSD buying in after T+4 or leaving participants to sort out failed trades, now the CSD says you need to buy them in and the regulator says you will get fined.
“Big markets such as the U.S. have moved to T+2 over time and we can manage. The industry won’t fall apart by October 8 but it’s going to represent a challenge for all participants.”
The repo and securities finance markets will also be significantly impacted by the move to T+2, notes the whitepaper. “In a standard repo transaction, the settlement date is T+2 and it involves raising funds to meet settlement obligations,” says Smith, “so as markets move to T+2 securities finance and repo markets need to move to T+1. Also, as you move to non-equities, the level of affirmations drop. There is a lot of paper involved in the confirmation
Same Day Affirmation Rates Still Worryingly Low, Says Whitepaper
Same day affirmation rates in non-equities market are still worryingly low despite the emergence of electronic trade confirmation platforms in the last decade, a new whitepaper argues.
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