Equities settlement fails across CSDs within the European Union fell to a monthly average of below 6% during the second half of 2022, a vast improvement on rates witnessed over the past two years.

This is according to the latest data available from the European Securities and Markets Authority (ESMA), which showed a steady decline from the significant rate of fails in 2021 – rising above 10% on a number of occasions.

Conversely, settlement fails in both corporate and government bonds saw slight but steady increases over the past 12 months, with government bond fails sitting at around 4% as of December 2022.

Despite the decline in equities, fails still continue to represent a significant concern for regulators and institutions. The securities lending committee of the Bank of England recently noted that settlement fails and penalties remain higher than expected, with technical issues, liquidity and deliberate fails cited as the primary drivers.

A more automated ecosystem has been touted as one potential solution to reducing fails, with manual processes and human error often a key factor in the reason a trade fails.

“The more channels are automated, the more there is agreed up front,” Sachin Mohindra, director at Goldman Sachs told Global Custodian, sister publication of The TRADE, in November. “With automation, at the point of trade, a lot of the required data for the enrichment is there immediately because you can look it up and have the correct reference data. As soon as you start manually intervening in that, then expect an email with the allocation splits and other data, these things start to disrupt and delay the settlement process.”

Automated solutions such as AccessFintech’s live settlement solution, have yielded significant results in reducing settlement failures. A year-long collaboration between Citi and JP Morgan on AccessFintech’s platform resulted in a 30% reduction in fails, and a 76% drop in email traffic for operational processes.

The Depository Trust & Clearing Corporation (DTCC) issued the following statement in response to the recent SEC announcement around the T+1 implementation date:

“Today, the SEC adopted final requirements for a May 28, 2024, implementation date for the move to T+1 settlement for transactions in US cash equities, corporate debt, and unit investment trusts. With this regulatory clarity, DTCC continues to be ready to bring this initiative forward. Accelerating the settlement cycle to T+1 will bring many benefits, including reduced risk, lowered clearing fund requirements, improved capital and liquidity utilization and increased operational efficiency. At the same time, DTCC recognizes that significant challenges remain towards implementation and will continue to partner closely with market participants, as well as regulators, SIFMA and the ICI, to promote a successful transition to T+1 and to safeguard the stability of the markets.

DTCC also appreciates the SEC’s clarification around the role of Central Matching Service Providers (CMSP) in helping the industry to achieve straight through processing. Straight through processing will help the industry to effectuate same day affirmation on a timely basis in support of the move to T+1.”

The Canadian Capital Markets Association (CCMA) has restated that Canada will reduce its standard securities clearing and settlement cycle to T+1 on the same date as the US.

The reaffirmation comes after the U.S. Securities and Exchange Commission (SEC) confirmed 28 May 2024 as the US market’s "compliance date" for moving to a shorter standard securities settlement cycle.

“There has been an inadvertent misunderstanding in the US that has led to US statements implying a different T+1 implementation date in Canada,” says Barb Amsden, lead, communications and education at the CCMA.

She adds: “Canada's position, since 2021, has been that Canada will reduce the Canadian standard securities clearing and settlement cycles to T+1 on the same date as the US”.

However, the SEC’s recently confirmed implementation date (28 May), which is a long weekend commemorating the US Memorial Day, is only a two-day weekend in Canada.

Commenting on this, Amsden says: “The CCMA, and other Canadian industry organisations, overwhelmingly recommended an implementation date of Labour Day 2024 (2 September) — a common US and Canada long weekend.”

Despite this, the CCMA has said it will “continue to work with Canadian and American market participants to replicate past successful settlement-cycle reductions.”

The revised settlement compression time of T+1 for the US market was officially proposed by the SEC in February 2022. It ensures securities trades are cleared and settled within one working day. The move will come seven years after T+2 first became the market standard in 2017.

The European Fund and Asset Management Association (EFAMA) has expressed concern around the European Securities and Markets Authority’s (ESMA’s) proposed approach to the use of ESG and sustainability-related terms when naming funds.

ESMA’s recent consultation on guidelines around naming funds suggested a numerical threshold approach, which EFAMA warns will not address the greenwashing issues that the financial industry is trying to tackle. A lack of clarity around the definitions of key sustainable finance concepts will allow such irresponsible practices to continue, it warns.

EFAMA advises ESMA to work with the European Commision to clarify the definition of a “sustainable investment” and ensure interoperability with SFDR, MiFID and other regulatory and directory demands before putting their proposed guidelines into action.

Anyve Arakelijan, regulatory policy advisor at EFAMA, comments: “It is unlikely that a methodology built on an unclear legal definition will increase investor understanding of ESG funds and adequately address greenwashing concerns.

“Rather than imposing a threshold, it would be more proportionate to mirror ESMA’s supervisory guidance on sustainability risks and disclosures by ensuring that use of ESG-related terms is supported in a material way with sufficient evidence of sustainability characteristics in the fund’s investment objectives and strategy.”