Activity

Mr. Topa emphasizes that improving settlement efficiency and adherence to market standards are crucial for creating greater stability and certainty in financial outcomes, not just from a European perspective, but globally. Their approach to achieving this involves adopting market standards that are already globally established and endorsed, after thorough due diligence, analysis, and collaboration across various markets and stakeholders.
Here’s a breakdown of the key elements and how market standards contribute to settlement efficiency and stability:
Globally Established and Endorsed Market Standards for Settlement Efficiency:
* CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI): These are foundational international standards for financial market infrastructures (FMIs), including securities settlement systems (SSSs). They cover legal basis, risk management, governance, and operational reliability, all contributing to settlement efficiency and stability.
* Settlement Cycle Shortening (T+): A global trend towards shorter settlement cycles (e.g., T+2, T+1, and even T+0 in some markets like India) is a significant move towards greater efficiency. The idea is to reduce counterparty risk and free up capital faster.
* The US and Canada transitioned to T+1 in May 2024.
* India has been a leader in T+1 and is even experimenting with an optional T+0.
* The EU is also evaluating the benefits and costs of shortening its settlement cycle.
* Central Securities Depositories (CSDs): Standards encourage the immobilization or dematerialization of securities and their transfer by book entry in CSDs.
* Delivery Versus Payment (DVP): CSDs should eliminate principal risk by linking securities transfers to funds transfers in a way that achieves DVP, ensuring that securities are delivered only if payment is made, and vice versa.
* Trade Confirmation: Prompt confirmation of trades (ideally on T+0) is vital for efficient settlement.
* Securities Lending: Encouraging securities lending and borrowing facilitates the settlement of transactions, especially in cases of failed deliveries.
* Automation: Increased automation in post-trade processes minimizes errors and speeds up settlement.
* Settlement Discipline Regimes: These regimes (like the EU’s CSD Regulation – CSDR) aim to reduce settlement fails by implementing clear rules, stringent penalties for non-compliance, and comprehensive monitoring mechanisms.
How Market Standards Improve Settlement Efficiency and Stability:
* Reduced Risk: Shorter settlement cycles and robust DVP mechanisms significantly reduce counterparty, credit, market, and liquidity risks.
* Increased Certainty of Outcomes: Clear rules, standardized processes, and effective monitoring ensure that transactions are settled as expected, reducing uncertainties and disputes.
* Enhanced Liquidity: Faster settlement frees up capital and securities, increasing market liquidity.
* Lower Operational Costs: Automation and standardized processes reduce manual errors and the need for costly reconciliation.
* Improved Market Integrity: A well-functioning settlement system builds confidence among market participants and investors.
* Systemic Risk Mitigation: By minimizing failed trades and ensuring timely settlement, market standards prevent the build-up of unresolved positions that could pose systemic risks to the financial system.
* Interoperability and Harmonization: Globally established standards facilitate cross-border transactions by creating a common framework, reducing fragmentation and friction between different markets.
Topa’s emphasis on “proper due diligence, analysis, and collaboration across various markets and stakeholders” is critical. Implementing these standards effectively requires a coordinated effort from regulators, central banks, CSDs, clearing houses, and market participants to ensure smooth transitions and broad adoption.

Video courtesy of Interactive Brokers.

Video courtesy of Interactive Brokers.