Despite promising early signs that the shift to T+1 in the US has been a success, recent evidence of increased settlement fails only serves to demonstrate that the industry has not quite mastered one day settlement yet. According to voluntary data that is aggregated and published by the New York Fed and the Office of Financial Research (OFR), weekly cumulative failures to receive and deliver totalled $530.8 billion at the end of September. While this is often a pressure point during the calendar year, this figure does represent the highest settlement failures from US dealers in two years.
With shorter settlement timeframes, and inevitable peaks in fails that come around on a cyclical basis, banks need to be able to minimise the number of fails and thereby reduce the associated costs. But addressing settlement fails leaves firms exposed to large volumes of manual processing and exception handling and increases operational risk.
To tackle the issue head on, financial institutions need to be looking at their own operational processes. The Citi Securities Services Evolution report revealed that over a third of projects related to the shift in the settlement timeframe – mainly in the form of further automation – will be pushed into 2025. This reality is particularly concerning with a Europe-wide move to T+1 earmarked for Q4 of 2027, and the Investment Association pushing for an even earlier implementation in 2026.
Operational automation has long played second fiddle to front office and regulatory projects, but now takes on a whole new imperative to address both efficiency and profitability. This is even more important for firms operating in Europe, which must contend with the imposition of penalties for failed trades under the Central Securities Depository Regulation (CSDR). We have learned that the implementation of tactical workarounds to meet CSDR penalty processing requirements – typically increasing staffing levels – leads to higher costs and inefficiencies over the long term. Some banks have to date been prepared to treat tens of millions of euros in penalties as an inevitable cost of doing business. This is not sustainable. Market participants in Europe should be using the next two years, proactively, to put in place solutions that enable them to handle the operational activity around failed and failing trades more effectively. This is necessary to ensure a reduction in their occurrence and their impact on the business.
Innovations in trade exception monitoring can make this achievable today. Operations teams can identify trades most at risk of failure in near real-time, tracking lifecycle status updates throughout the day, and maintaining a consistent monitor on trade matching. To effectively stem the flow of settlement failures analysts need as much time as possible to resolve the more complex queries. Key to this is automating messaging to counterparties and learning of instruction mismatches as soon as they hit the Swift Gateway.
Through the integration of AI modules an additional layer of predictive insights can be added to a bank’s arsenal. In the settlement context, AI can provide the ability to analyse historical patterns across counterparty, asset class, and other factors to forecast settlement statuses and prioritise trades based on their value or the associated costs of potential fails.
The opportunity to utilise predictive analytics to generate forecasts for the cost of fails, while enabling greater collaboration and resolution management with counterparties before receiving penalties, provides a more permanent solution to the persistent issue of settlement failures. With multiple areas that contribute to this, financial institutions can no longer afford to let outdated systems and manual processes drag them down.
While market participants prepare for similar changes in other regions, there are many lessons that can be learned from the US move to T+1. By embracing automated solutions, including predictive analytics and AI-driven insights, firms can effectively tackle the intertwined challenges of T+1, CSDR penalties, TMPG, and interest claims on failed trades. This approach not only protects revenues and enhances operational resilience, but also provides a competitive edge as the industry advances towards faster, more transparent settlement processes.
If the challenges outlined resonate with you, and you would like to discuss how we can help with your settlement operations, please get in touch at MeritsoftCapMarkets@Cognizant.com.
To learn more about our Trade Tracking and Exception Management solution click here.
