US lags in same-day affirmation

clearing capital to increase

The US market falls behind its global peers when it comes to same-day affirmation (SDA) scores and the chance that trades will fail, according to a study by post-trade utility Omgeo.

The study compares SDA scores of 24 million trades per month happening in 46 countries on Omgeo’s Central Trade Manager (CTM), Oasys Global and TradeSuite.

In markets with SDA rates over 90 percent, which include India, Taiwan, Hong Kong, Japan, Singapore and Korea, settlement efficiency is 26 percent higher than in markets with SDA rates lower than 70 percent, which include Brazil, Italy, South Africa and the US, according to officials.

"Working in a trade-date-plus-two (T+2) market seems to drive high levels of automation," says Tony Freeman, executive director of industry relations and market growth at Omgeo. "It seems to drive SDA as a target for the market as a whole."

With a low SDA rate in the US, about $4.1 trillion worth of eligible trades handled by the Depository Trust and Clearing Corp. (DTCC) are at risk each year, because trades are settled even without being matched or affirmed, according to the Omgeo research.

"They settle even if the processes are not ideal," says Lisa Ortner-Ghouze, executive director of global markets at Omgeo, and a co-author of the study. "Trades really should be matched before they settle. This is a practice that needs to be changed. They recognize that."

"The number one priority in the US is to eliminate the problem around match-to-settle," adds Freeman. "Our clients have told us to get that problem solved, then focus on the SDA rates."

Omgeo's findings dispel a myth that the buy side is less efficient than the sell side, according to Freeman. "If both sides put their technology in place, and you have an operating model that facilitates near real-time processing, then you get high levels of efficiency," he says.

Overall, with Asia tending to have the highest SDA rates, and the Americas tending to have the lowest, European markets fall in between, typically in the mid-80 percent range, according to the research. Switzerland, with a T+0 settlement requirement, has 87.6 percent SDA. Canada, with 76 percent SDA, has the highest rate in the Americas.

"Europe is debating a move to a shorter settlement cycle, and has a harmonized T+2 environment," says Freeman. "That's not been decided yet but is under consideration. There is some industry feedback that would cost a lot of money to engineer and may have a negative effect in increasing trade failure. But the Canadian example has the opposite."

A European move to less than T+2 could push the US and the Americas to improve, according to Ortner-Ghouze. "Global economies are very closely intertwined," she says. "This isn't something that the US can ignore altogether. It's very likely that the move from T+2 in Europe would generate debate in the US about what to do. We anticipate this starting early next year as it heats up in Europe."

Read more articles like this one at Waters Technology

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