Firebrand Research, the leading independent research and advisory firm specialising in capital markets technology and market trends, today announced its latest report examining the cost of settlement failures.

It reveals the scale of industry-wide issues that have resulted in US$914.7bn in the form of regulatory penalties and resolution measures. As the capital markets industry focuses on shortening the settlement cycle in key jurisdictions across the globe, the lack of efficiency within the post-trade lifecycle has come into greater focus.

The industry has lacked tangible statistics within this realm. To address this data gap, Firebrand Research has worked with a range of key market participants, including buy-side firms, sell-side firms and market infrastructures to collate the first-of-its-kind benchmark data on the true cost of settlement inefficiency.

The research found five core themes that the industry must address:

Unpredictability of costs: One of the greatest challenges for operations heads over recent years has been coping with the impact of market volatility on operational costs. Higher volumes have tended to mean more settlement failures, and with higher failure rates come increased costs and greater risk. Moreover, the increased industry visibility around operational efficiency and resilience has raised the stakes when it comes to the reputational risk posed by these failures.

Unsustainable spending: Firebrand’s estimates indicate that the industry has spent at least US$914.7 billion over the last decade on penalties and failure resolution measures, with much more spent during the last four years due to volatile market conditions. At the peak of the market volatility in 2021, the industry spent US$161.63 billion on resolving settlement failures within major equities and fixed-income markets.

A lack of consistent global market practices: The industry doesn’t have a standard means of measuring settlement efficiency and the global industry costs related to failed settlements have long been a challenge to estimate. This begins with assessing what counts as a settlement failure, as different markets and firms within those markets use different metrics and definitions.

There’s not enough time before May to address all these inefficiencies: Given the tight implementation timeframe for T+1 in the North American markets and the number of firms that are in need of modernising their technology stacks, full-blown legacy replacement projects are unlikely to be attempted before the May 2024 deadline.

The regulatory focus isn’t going away: The industry focus on shortening the settlement cycle in key markets across the globe over recent years has stemmed from a regulatory and market infrastructure push to modernise the industry plumbing. This is set to continue as more markets examine moving to T+1 or T+0.

Virginie O’Shea, founder and CEO of Firebrand Research, comments: “One clear way firms can address their settlement efficiency is by completely modernising their technology stack and transitioning away from legacy systems that can’t keep up with the demands of a shorter settlement cycle and an innovative cyber-criminal community. However, this is far from a simple proposition, as these systems have often become embedded within the fabric of the organisation and buried under a spaghetti-like network of dependent systems. In the meantime, firms can invest in various supporting solutions to improve communication efficiency, adopt standards such as the unique transaction identifier (UTI) and services offered by market infrastructures to reduce the impact of failures.”

Source: Firebrand Research