Direct Correlation Between Same Day Affirmation (SDA) and Settlement Efficiency Revealed in New Omgeo Study

  • Settlement efficiency 26% higher for the top countries by SDA rate, than the lowest countries
  • SDA shown to be critical prerequisite for shorter settlement cycles
  • Asia leads the way with regulation as a key driver
  • SDA proven to dramatically decrease at-risk securities

SIBOS, Amsterdam – October 26, 2010 – Securities trades verified on the day of execution (known as Same Day Affirmation, or “SDA”) have a much higher chance of settling on time and are less likely to fail according to a study published by Omgeo, the global standard for post-trade efficiency. The direct correlation between high SDA rates and high settlement rates was confirmed by comparing SDA scores from several Omgeo services (Omgeo Central Trade ManagerSM (Omgeo CTM), Omgeo OASYS GlobalSM and Omgeo TradeSuiteSM), representing 46 countries and averaging 24 million trades/month, with perceptions of settlement efficiency, as measured by the Global Custodian surveys of agent banks in the major and emerging markets.

The findings demonstrate that SDA is a key contributor to improved settlement efficiency. It further draws a direct correlation between SDA and shortening settlement cycles. Among the key findings of the study are:

  • SDA leads to settlement efficiency: Settlement efficiency in countries with SDA rates of over 90 percent – India, Taiwan, Hong Kong, Japan, Singapore and Korea – is 26% higher than in countries with SDA scores of less than 70 percent – Brazil, Italy, South Africa and the United States.

  • Shorter settlement cycles increase SDA and settlement efficiency: Four of the five countries that display the highest SDA rates and settlement efficiency rates require T+2 settlement for most securities. These include India, Taiwan, Hong Kong and Korea. Similarly, South Africa, which has one of the lowest SDA rates and settlement efficiency scores, operates on a T+5 cycle.

  • Asian markets lead the way in SDA: From a regional perspective, Asia displays the highest SDA rates (94 percent regional average) and the Americas the lowest (53.8 percent average). In Asia, India, Taiwan, Hong Kong, Singapore and Korea lead the way with SDA rates over 90 percent. In the Americas, the United States has the second lowest SDA rate with 46.9 percent, after Argentina, while Canada has the highest. In Europe, SDA rates are consistently in the mid 80 percent range, with Switzerland scoring highest with an 87.6 percent SDA rate, and Italy the lowest with 68.4 percent.

  • SDA dramatically decreases at-risk securities: In the U.S., $4.1 Trillion DTCC eligible trades are at risk on an annual basis because of poor market practices that allow trades to settle even if they have not been affirmed or matched.

  • Regulation is a key driver for achieving high SDA rates: While many factors determine SDA rates, including regional and cultural practices, regulation remains a key driver. A number of regulations are in place in Asian markets that require prompt trade matching or affirmation on T+0. In Europe, Switzerland, which has the highest rate of SDA in the region, has a Code of Conduct which requires trades to be confirmed on the day of execution (T+0).

  • Central trade matching increases SDA rates: Centrally matched trades are more likely to be affirmed on the day the trade was executed (average SDA of 86.5 percent) against locally matched trades (average SDA of 66.6 percent).

  • Different asset classes have varying SDA rates: There are significant differences in SDA rates between equity and fixed income trades, with the latter registering lower SDA rates. This discrepancy is due to the relatively less mature automation levels in the fixed income space compared to the equities market, the over-the-counter nature of the asset class and the historic workflow practices in the fixed income market.

Commenting on the findings, Marianne C. Brown, CEO of Omgeo, said “By demonstrating a direct correlation between SDA rates and settlement efficiency, this study has confirmed key factors that lead to greater operational efficiency and reduced risk in the financial marketplace. To date, global policymakers have focused on the downstream processes of clearing and settlement in their quest to improve the safety of the financial markets. However, this research demonstrates that the accuracy and timeliness of middle office functions should not be overlooked as a key enabler of settlement efficiency. As policymakers in Europe consider a move to a T+2 environment, SDA is critical because it accelerates the post-trade process and leaves enough time to identify and address any errors and mismatches before trades are due to settle.”

John Gubert, Senior Advisor Unicredit GSS and Chairman of ISMAG[1], added: “This is a sound empirical analysis which confirms to us, beyond all doubt, that same day affirmation improves settlement efficiency. The market needs to focus on higher take up of same day affirmation as a key tool in operational risk management. Unless we set our house in order, we may find that regulators, quite rightly, add our failings in this area to the list of their concerns."

The full results of the study can be found in the Omgeo discussion paper titled “Mitigating Operational Risk and Increasing Settlement Efficiency through Same Day Affirmation (SDA)” at www.omgeo.com/sda.

[1] ISMAG stands for International Securities Market Advisory Group; it was formed in 2007 by Euroclear Bank and Clearstream Banking Luxembourg to improve asset servicing processes of international securities deposited in the International Central Securities Depositories (ICSDs).

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