The transition to T+2 settlement throughout the European Union (EU) is
scheduled for January 2015. Some countries may transition before this date.
Henceforth, from January 2015 equity and bond trades will settle two days after
trade date across the EU. This is a major accomplishment as it’s the first
region to reduce the time between trade and settlement date from T+3.
One unknown consequence of this change is the impact on Confirmation /
Affirmation (C/A) rates. The C/A process
occur between institutional investors (buy-side) and their brokers (sell-side).
Institutional trade volumes represent the largest number, and greatest value, most
broker’s business.
The C/A process is the presentation (confirmation) of trade details by
the sell-side and approval (affirmation) from the buy-side. The current rate of
successful affirmation on or before T+1 is between 60-70%. In a T+2 environment
positive affirmation must be made on trade date.
Un-affirmed trades must be reconciled to ensure timely settlement and to
avoid failed settlements. In the current T+3 environment manual work-arounds
are used to identify and resolve un-affirmed trades. But in a T+2 enviroment, with one less day, manual
work-arounds will be less effective. As a result the industry must respond to
this situation to ensure the success of T+2 settlement.
There are alternative responses that can address this situation; one is
for the buy-side to review and respond to the confirmation on trade date.
Another alternative is for the buy-side to empower their custodians to affirm
trades on their behalf. Both will permit sufficient time for exceptions to be
resolved and advise custodians of the pending settlements. Both alternatives
can be implemented with minimal changes to buy-side internal worksflows and minor
technology modifications.
These alternatives are
short term solutions to the C/A process. The global industry needs an integrated model
so that the C/A process is incorporated into the order-trade workflow. The C/A
process should be automated with minimal touch-points required. There are
systems in place today that come close to this model, but they have not been
fully embraced by the community. The industry must determine why these systems
aren’t fully utilized. They must address these issues or commission development
of a system that is acceptable to all order to trade lifecycle participants
What’s your opinion on this situation?
Any idea why
affirmation rates are so low?