Industry Updates

AFME makes proposals to boost settlement efficiency ahead of T+1

Aimed at boosting lower settlement efficiencies on the continent

Theo Andrew


The Association for Financial Markets in Europe (AFME) has made a series of recommendations to improve settlement efficiency ahead of any planned move to T+1.

The AFME report, in partnership with Deloitte, made 10 proposals in a bid to reduce settlement fails including providing all settlement information on the trade date, the introduction of auto-partial settlement by all central securities depositaries (CSDs) and the introduction of an industry-wide fails reporting methodology.

It comes as US markets prepare to move to a T+1 settlement cycle by May 2024 while European regulators consider following suit.

European markets are also suffering from increased settlement delays following the introduction of phase three of the Central Securities Depository Regime (CSDR) in February 2022.

The report found settlement failings are driven by counterparty behavioural factors such as the inability to match and allocate trades as well as data quality and inventory management issues.

To improve this, AFME said market participants should use “centralised industry platforms for pre-settlement matching and allocation processes” and work closely with data vendors to stamp out quality issues.

It also noted the industry and regulators should work together to review if the CSDR cash penalties regime creates disincentives for timely settlement.

Earlier this year industry experts warned ETF investors were facing higher costs when trading as authorised participants (APs) were forced to widen bid-ask spreads.

CSDR has been plagued with issues since its introduction and the Bank of England warned last December penalties have been “bigger than expected” due to technical issues with legacy systems, liquidity of the underlying security and “deliberate fails” by market makers.

Despite this, AFME said there was evidence the introduction of CSDR cash penalties has shown positive signs of reducing settlement fails for equities.

The industry body added the failure reporting methodology should also be improved with more granular transaction types beyond “lack of securities” and “lack of cash”.

“Data should also capture the liquidity profile of the instrument and the duration of settlement fails more explicitly, avoiding duplicative counting of instructions which fail for multiple business days,” the report suggested.

Pete Tomlinson, director of post-trade at AFME, said: “Although there is some evidence that the CSDR has improved settlement fail rates, it is critical that more work is done to address remaining inefficiencies.

“This work becomes particularly important in the context of a potential move to T+1. Our analysis highlights that the importance of pre-settlement matching processes is even greater in European markets than for other jurisdictions, given the differences in market structure, processes and standards.”

The 10 recommendations are:

  • All information necessary for the settlement of a transaction should be provided on trade date

  • Industry participants should work collectively on solutions to known instrument data quality issues and holiday calendars

  • Industry should adopt enhanced status monitoring and exception management processes, including further consideration of the adoption of a unique transaction identifier for use in post-trade operations

  • Industry should work together to identify and address gaps in existing market standards

  • Firms and providers, including trade matching vendors, should review internal controls to ensure consistent matching criteria, thresholds, and static data throughout the chain

  • Industry and regulators should review scenarios where CSDR cash penalties regime creates disincentives to timely settlement, and implement regulatory or market practice changes where necessary

  • Auto-partial settlement and hold with partial release should be offered by all CSDs

  • Settlement intermediaries should facilitate and encourage the use of auto-partial and partial release by their clients

  • CSDs and settlement intermediaries explore further opportunities to optimise the flow of securities through settlement systems

  • A single, granular fails reporting methodology to be used by the entire industry

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