ECSDA publishes its Settlement efficiency considerations
In November, one year and a half after the implementation of the Settlement Discipline Regime, the ECSDA Settlement Working Group is releasing this discussion paper to share its preliminary analysis about the main root causes of settlement fails in Europe, as far as visible at the level of CSDs and reported through a survey by their participants. The intention is to share some initial recommendations to improve the settlement efficiency in Europe.
The deep attention of CSDs to settlement efficiency is driven by one of their main missions which is to support market efficiency and financial stability. Settlement fails stand in the way of efficiency by generating undue costs, creating further frictions for the connected transactions and ultimately being a driver of systemic risk. If a participant is expecting to receive securities or cash on the intended settlement date but is not receiving them because of a settlement fail from its counterparty, there is a risk that the affected participant is also unable to meet its obligations with other counterparties. That might result in a potential “domino effect” and be a cause of systemic risk.
However, in our view, allowing for a lower level of fails is preferable to aspiring to full efficiency, as it might lead to an unreasonable level of rigidity in financial markets and result in high costs (for pre-funding in addition to the necessary ecosystem technology upgrades). A certain level of tolerance is instrumental to the well-functioning financial markets aspiring for high levels of liquidity and settlement velocity.
This paper is, therefore, looking at how to reduce the number of fails, while not reducing the volume and value of transactions to be settled.