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?