T+2 May Lead to More Failed Trades

Terry Flanagan

Chris Smith, head of post trade at Trax, the trade matching and reporting services technology provider, warned that the number of failed trades is likely to rise after a shorter settlement cycle is introduced in Europe in October.

The standard settlement prior for securities will be reduced from T+3 (trade date plus three business days) to T+2 in 26 European markets on October 6 2014.

Smith told Markets Media that the industry has a lot of work to do to meet the October deadline.

“T+2 creates the momentum for change for all participants in the trade life cycle,” Smith added. “The focus will be on confirming trades as fast as possible which will be a challenge for the buy-side who tend to check their allocations at the end of the day.”

Chris Smith, Trax

Chris Smith, Trax

Trax said in a white paper on T+2 that both sides of a deal need to agree confirmation within 15 minutes of execution in order to meet the reduced settlement time.

“We have seen increased interest from clients in how to use Trax most efficiently to ensure that all transactions are matched as soon as possible after executions and matching rates have gone up,” he added.

This month technology provider Fidessa launched an affirmation management service for the buy-side.

Fidessa AMS allows buy-side frims to interact over FIX with brokers and avoiding manual processes.

David Pearson, strategic business architect at Fidessa and co-chair of the FIX trading community post-trade working group, said in a statement: “The move to T+2 settlement in Europe will herald the start of yet more scrutiny by all sizes of buy-side firms of their post-trade operations, as they strive to adhere to this and cope with the other evolving regulations that are expected.”

Smith said the scale of the move to T+2 is unprecedented as it will involve 26 European as well as central securities depositories Euroclear and Clearstream and include equities, government securities, corporate bonds and other debt securities.

The Trax paper said the industry is very unlikely to be able to make all the changes required before October 6 due to the scale of the move, contractual constraints, dependencies on clients and suppliers, and the need to focus resources and technology development on meeting other regulatory requirements.

Smith said that the quality of confirmations varies across asset classes.

For example, in equities more than 90% of trades are matched electronically on trade date while in fixed income this falls to 50%. He added that the confirmation process in the repo market is still very manual, with less than 10% of repo trades being matched electronically.

“We have seen a big demand for electronic repo confirmations and these are being tested by some of our US customers,” Smith added. “As repo volumes rise manual processes and not practical and new participants are entering the market who want electronic matching.”

From October 6 trades with clients or counterparties outside Europe will also be settled on a T+2 basis.

Tony Freeman, executive director of industry relations at post-trade services provider Omgeo told Markets Media this month that US market participants are aware that T+2 in Europe will impact on their own trades. “T+2 will take 24 hours out of the process,” Freeman added.

Smith said it is almost inevitable that the number of failed trades will rise in October. “The question to ask is how long this peak will last,” he added.

Regulators have said they will fine firms who have a large number of failed trades but have not specified how the fines will be calculated or when they will be enforced.

London-based Trax was acquired by MarketAxess Holdings, the operator of a global fixed income electronic trading platform, last year.

Featured image via isaincu/Dollar Photo Club

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