In early 2022, the Settlement Discipline Regulation (SDR), the European Regulation on improving settlement in the European Union, came into force. Thereafter, financial institutions have focused on settlement efficiency as a matter of priority.
The aim of this regulation was to establish uniform requirements for settlement in securities markets and to harmonise measures within the European Union to prevent and address settlement fails. The sector is satisfied with the efforts undertaken so far, although it recognises that the efficiency of fails has not yet reached 100%.
Aurora Cuadros, Corporate Director of the Securities Services Division at Cecabank, said recently during the 2nd Post Trading Conference organised recently by BME: "We have made significant improvements, but we want to excel. Financial institutions are disciplined by nature, the implementation of this regulation has not drastically changed the settlement of transactions, we have placed greater focus on making it transparent for our clients, and we have to be pleased with the result". In her opinion, there are a multitude of reasons why there are still a number of fails, some of which are due to the internal structure of the financial institutions themselves; and others are more structural, for example, that if there were more securities in the market, the gap in fails would be reduced.
As explained by Roberto Bermejo, Deputy Director of the post trading division at the CNMV, 'the three pillars introduced by the disciplinary regime are as follows: mechanisms to improve efficiency, buy-backs and penalties. They may lead to some changes, but we do not believe they will be traumatic".
On this path to improving process efficiency, there are several tools that financial institutions can use. Elena Mesonero, Regional Director for Spain and Latin America at Caceis, commented on the issue of partial settlements (also known as partial release). According to the expert, this mechanism is no longer used to reduce the number of fails "because, in addition to the high costs, many institutions have had a hard time adapting. You need to have an agile and flexible system where the custodians, with all the information, can be more proactive".
The transition from T+2 to T+1
Another consideration that needs to be taken into account from now on is the change in the settlement period in the US from T+2 to T+1 by 2024. "Transactions continue to fail for the same reasons, especially due to a lack of securities, but also due to late instructions, something that will have to be taken into account in the transition to T+1. On the other hand, on occasions there exists miscommunication between clients", said Manuel Pineda, Head of Custody and Securities Settlement, Citibank Europe PLC, Spain, Citibank.
In this regard, Mesonero stated that "the advent of the Target 2 Securities regulation was a big change for everyone, with a major investment in platforms, systems and training. It has made the industry consolidate its position". On this path towards standardisation, there is still some way to go on the asset side of securities: "We are going to see this with the advent of T+1. We are very concerned because there are many markets with many particularities", he stressed. This is a view that Cuadros agrees with: "There will be significant impacts, some of them will bring benefits and others will pose operational challenges".
The journey towards T+1 is a very complex process, especially in Europe, as it affects the entire investment value chain. This is why the regulator is taking a cautious approach: "The cost-benefit impact needs to be carefully assessed and, for this, input from the industry is needed. An assessment is necessary on whether to move to T+1 or to stay at T+2. Currently, the two systems will coexist, and here regulators have to work to identify particularities of the regulation to facilitate processes", Bermejo concluded.
