According to data from the Swift network, one in ten trades doesn’t settle as intended, while one in 20 trades settles late. Making matters worse, most of these late or failed trades are transactions involving high-value fixed income securities.
During Sibos 2023, I had the opportunity to speak with Christine Strandberg, head of product management for investor services banks at SEB to discuss why this is, the problems settlement fails cause, and, most importantly, what the industry can do about it.
“There are two key causes for fails, namely late matching or a lack of securities,” said Strandberg. And this settlement inefficiency is not just time-consuming to resolve but creates actual monetary costs for our industry.
For example, an analysis based on the transaction volumes from both the Bank of England and the European Central Bank found that around 60 billion combined is stuck in the system on a daily basis because of trade settlement inefficiencies. Now, imagine the returns you’d generate if all of that trapped cash was deposited in, let’s say, a six-month T bill account.
Shorter settlement cycles add new urgency
There’s a real possibility that the number of fails will increase as more countries roll out T+1 settlement cycles and financial institutions face an increasingly fragmented settlement environment.
The US, Canada and Mexico are poised to adopt T+1 from May 2024, while the EU and UK are consulting on it. India – having only just migrated to T+1 in early 2023 – is already talking about potentially introducing T+0 in October 2024.
“In the Target2Securities [T2S] markets, the stock exchanges shut at 5:00-5:30pm. If T+1 is adopted in that region, we would have two to three hours to get ready for settlement. That’s a very short timeframe, so we can’t be reliant on manual processing,” explained Strandberg.
The cost of fails could also jump as more regulators start penalising for settlement discipline violations. For example, the EU’s Central Securities Depositories Regulation (CSDR) imposes cash penalties on the financial institutions responsible for trade fails.
With the CSDR Refit now underway, some believe mandatory buy-ins could be introduced if fail rates don’t improve.
Transparency is non-negotiable
Right now, our industry has limited visibility into the securities settlement lifecycle, and this needs to change. After all, if you can track the status of your taxi or food delivery on your phone, why can’t you monitor your multi-million dollar securities transactions?
Technology can pave the way forward by bringing greater transparency into the trading lifecycle, increasing straight-through processing (STP) and eliminating manual touchpoints, which ultimately lowers costs and reduces risk.
This is why the industry has come together to develop a common solution that doesn’t require you to reinvent the wheel.
Swift Securities View allows you to track securities transactions from end-to-end throughout the entire settlement lifecycle. It does this by leveraging the Unique Transaction Identifier (UTI), an ISO standard, alphanumeric code that links all Swift messages related to the same securities settlement flow across both buyers and sellers. Securities View can provide both the location and the status of every transaction, in real time, across the Swift network.
This transparency helps you react quickly to detect and resolve exceptions, so you can avoid or limit penalties for late settlement. By providing better insights into the transaction lifecycle, you can reduce operational risk and costs, improve STP and boost settlement efficiency to meet the challenges of T+1.
“Securities View and the UTI truly benefit the financial institutions which are trading with each other,” said Strandberg. “If intermediaries are not supporting the UTI or using Securities View, there is a risk they could be disrupting the trading flow.”
Adoption will be an enabler
I think we all recognise the need for better visibility into the trading lifecycle, and this has been a key driver in the rapid take up of Securities View.
Today, over 80 of the world’s leading financial institutions – which represent one-third of the daily securities traffic on the Swift network – have signed up to use it. These include firms across all parts of the settlement chain, from broker dealers and asset managers right through to custodians and CSDs.
“I believe everyone should be joining Securities View and having their messages sent through Securities View,” commented Strandberg. “Even if you cannot yet support the UTI in your messages, you can at least opt into the Securities View service so that your messages are still available to those who are using it.”
Tracy Chou is a senior securities expert at Swift, overseeing the go-to-market effort in securities settlements, digital assets, and corporate actions covering North America and LATAM.