2011年-ECB欧洲央行_Settlement_fails_-_report_on_securities_settlement_systems_SSS_measures_to_ensure_timely_settlement_10页_258kb

Summary of "SETTLEMENT FAILS - REPORT ON SECURITIES SETTLEMENT SYSTEMS (SSS) MEASURES TO ENSURE TIMELY SETTLEMENT"

Introduction

This report provides an informative overview of settlement fails in securities settlement systems (SSSs) within the European Union (EU). It aims to explain the nature of settlement fails, their consequences, and the measures in place to prevent, discourage, and mitigate their effects. The report highlights the importance of understanding settlement fails for central banks in their oversight of payment systems and SSSs.

Core Content

1. Background Information on Settlement Fails

• Definition: A trade is considered to have failed if the seller does not deliver the securities or the buyer does not deliver the funds by the settlement date.
• Types of Fails:
  • In FOP (free-of-payment) transactions, fails typically refer to non-delivery of securities.
  • In DVP (delivery-versus-payment) transactions, fails may also occur in the cash leg.
• Aged Fails: A fail becomes "aged" if it remains unsettled beyond the agreed time period. Aged fails are subject to specific mitigation measures.

2. Consequences of Settlement Fails

• Credit Risk: Parties are exposed to credit risk in FOP transactions or replacement cost risk in DVP transactions.
• Liquidity Risk: Both parties may face liquidity issues due to the unavailability of expected funds or securities.
• Systemic Impact: High fail rates can lead to "daisy chains" and even "round robin" scenarios, potentially disrupting the entire settlement process.
• Market Impact: Securities lending markets may be affected as lenders may withhold securities, increasing fail rates and prolonging durations.

3. Determinants of Settlement Fails

• Operational Risk: Mistakes in settlement instructions (e.g., due to miscommunication or system errors) can lead to fails.
• Liquidity Problems:
  • Unavailability of assets due to cascading fails.
  • Short selling issues, especially "naked short selling".
  • Market stress reducing securities lending.
• Lack of Incentive: If the cost of failing to deliver is lower than the cost of borrowing, participants may lack incentive to avoid fails.

Main Measures to Ensure Timely Settlement

3.1 Market Rules, Regulations, and Best Practices

• STP (Straight-Through Processing): Automated transmission of settlement instructions from exchanges and CCPs reduces manual errors.
• CCP Role: CCPs reduce fail rates by:
  • Indirectly managing counterparty risks.
  • Directly using multilateral netting to reduce settlement amounts.
• Pre-Settlement Measures:
  • Matching facilities to detect operational errors early.
  • Early information systems to alert participants of shortages.
  • Hold-release mechanisms to separate matching from availability.
  • Queue management and settlement optimisation.
  • Incentives for early instruction submission (e.g., lower fees).

3.2 Settlement Facilitating Services

• Securities Lending and Borrowing: SSSs offer these services to support settlement.
• Intraday Credit and Self-Collateralisation: Cash settlement is supported by using delivered securities as collateral.
• Partial Delivery: In the last settlement cycle, partial delivery may be accepted to avoid full failure.

3.3 Review of SSS Regulations and Procedures

• SSSs regularly monitor fails and consider revising procedures to enhance settlement efficiency.

Measures to Discourage Settlement Fails

4.1 Penalty Schemes

• Delay Fees: Charged for delayed settlement, with higher fees for repeated fails.
• Compensation Penalties: Paid to the innocent party as a percentage of the failed transaction.
• Cancellation Fees and Penalties: Higher than delay fees.
• Other Penalties: Costs of mitigation procedures (e.g., buy-in, sell-out) are borne by the failing party.

4.2 Other Discouragement Measures

• Publication of Chronic Fail Data: Including the identity of failing participants in extreme cases.
• Exclusion from SSS: As a very extreme measure.

Measures to Mitigate the Effects of Settlement Fails

5.1 Definition of Aged Fails

• Aged fails are unresolved fails beyond the settlement period, and may be subject to cancellation or other mitigation actions.

5.2 Forced Buy-In/Sell-Out and Liquidity/Guarantee Funds

• Forced Buy-In: SSS buys the securities for the failing party, using cash collateral or guarantee funds.
• Forced Sell-Out: Selling securities or collateral to complete the transaction.
• Mutual Clearing Funds/Guarantee Funds: Used to cover positions of failing participants.

5.3 Role of CCPs in Facilitating Settlement

• Multilateral Netting: Reduces liquidity needs and settlement amounts.
• Risk Management: CCPs help limit the impact of defaults and contain the propagation of fails.
• Market Discipline: CCPs can encourage proper behavior through marking-to-market and buy-in procedures.

5.4 Fails Management in DVP Models 3 and 2

• DVP Model 3 (Net Settlement): Aged fails can affect participants not directly involved in the failed trade.
• DVP Model 2 (Gross Securities, Net Cash): If securities are insufficient, the entire batch is stopped, and transactions are deferred to the next cycle.

Key Information

• Lack of Uniformity: There is no uniform methodology or data availability across EU SSSs for measuring and reporting fails, making cross-comparison difficult.
• Impact of DVP Models: DVP model 3 can have broader systemic effects than DVP model 1.
• Mitigation Strategies: Include special procedures, liquidity funds, and simulation exercises.
• Incentive Structures: Market participants may lack incentive to avoid fails if the cost of failure is lower than the cost of borrowing.

Conclusion

The report outlines the causes, consequences, and measures to address settlement fails in SSSs. It underscores the need for harmonised approaches, better data collection, and robust mitigation strategies to ensure the stability and efficiency of securities settlement processes in the EU.