Over the past ten years the industry has poured $914.7 billion in the form of regulatory penalties and resolution measures, new research has found.
A report by Firebrand Research worked with a range of key market participants, including buy- and sell-side firms and market infrastructures to collate the first-of-its-kind benchmark data on the true cost of settlement inefficiency.
At the peak of the market volatility in 2021, the research found the industry had spent $161.63 billion on resolving settlement failures within major equities and fixed-income markets.
The issue is particularly pertinent given the upcoming shift to T+1 settlement in the US, meanwhile late last year the European Securities and Markets Authority (ESMA) published a consultation paper on the CSDR penalty regime seeking input on amendments which may include cash penalties that increase with the length of the settlement fail.
“The high cost of settlement failure resolution relates to the fact that even if you have fully automated your own post-trade lifecycle support system, your clients and counterparties may not have,” Virginie O’Shea, founder and CEO of Firebrand Research, told The TRADE. “As an industry, we’re only as strong as our weakest link. The FTE hours sunk into fixing data problems and locating securities are unsustainable in the long term, especially as time horizons for this work get shorter.”
O’Shea noted that one of the major issues is a lack of consistent global market practices. “The industry doesn’t have a standard means of measuring settlement efficiency and the global industry costs related to failed settlements have long been a challenge to estimate,” she noted, before highlighting how markets and firms within markets use different metrics and definitions of what actually counts as a settlement failure.
These issues are not going to go away as global markets look to continue reducing settlement cycles, which will not end until – at the earliest – T+0.
“One clear way firms can address their settlement efficiency is by completely modernising their technology stack and transitioning away from legacy systems that can’t keep up with the demands of a shorter settlement cycle and an innovative cyber-criminal community,” O’Shea said. “However, this is far from a simple proposition, as these systems have often become embedded within the fabric of the organisation and buried under a spaghetti-like network of dependent systems. In the meantime, firms can invest in various supporting solutions to improve communication efficiency, adopt standards such as the unique transaction identifier (UTI) and services offered by market infrastructures to reduce the impact of failures.”