With Europe now preparing for the move to T+1, firms are looking to the US for lessons learned from their successful move to a shorter settlement cycle last year. Industry-wide education was a major enabler, but at the firm level, automation was also a key factor in the smooth transition.
Automation is often discussed in abstract, its benefits talked about in terms of people hours saved, as that is often the most visible. The more post-trade processes that can be automated, the less time a person needs to spend overseeing the everyday trade flow, freeing them to tackle trade fails and other higher-value tasks.
According to a report by Firebrand Research, over €70m was paid in CSDR penalties each month in 2024. Combined with other costs – such as staffing, additional stock lending, or interest rate claims – the final price tag of trade fails can be significant if market participants don’t prepare adequately.
The success of automation also needs to be measured through the proper metric. In the US, the major focus was improving the affirmation rates of trades. This was widely accomplished, with the DTCC publishing that the affirmation rate was close to 95% on the eve of the transition. Fail rates, which were expected to rise, stayed the same. A sign of a success but on the flipside, they did not go down, despite the focus on improving settlement efficiency.
Firms looking to automate in the far more complex European markets should target the tasks that can help reduce fail rates, since that is where additional settlement costs originate. Affirmation is one important step, but T+1 requires tackling settlement efficiency from several different angles, including at confirmation and instruction stages.
Predicting trade fails
Beyond the top-level savings that automation can produce, firms are also unlocking new capabilities.
Automation is not solely giving tasks previously performed by a human to a machine. To fully see its benefits, data needs centralising, and trades linking in a single platform. Greater data transparency – a requirement in an automated system – will enable firms to make more strategic decisions, for example, on their stock lending and recall activities.
This will also enable firms to get to the root cause of fails. Identifying the type of trade or which counterparties or service providers are more likely to fail will enable firms to make concrete plans to address shortcomings.
That’s the basis of Meritsoft’s work with Euroclear and Taskize through EasyFocus+. Platforms like this use predictive analytics and collaboration tools to accelerate the resolution of matching and settlement issues, allowing firms to both identify counterparties at risk of a trade fail and benchmark their performance against the industry average.
Combined with the internal data that a firm has of its historical trade fails, a central data repository feeding into an automated solution can provide a real-time warning of trades at risk. Armed with this data firms can have practical discussions with custodians, as well as brokers and counterparties who may have higher than average fail rates and work proactively to improve them.
As firms plan for T+1, operations team should carefully consider where the weak links are across the entire post-trade lifecycle.
If you would like to discuss how we can assist in automating your settlement operations, please contact us at MeritsoftCapMarkets@Cognizant.com.
