Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK says it wants to guide the world in pretty much everything. Yet all too often it gets bogged down in disputes about whether it should align with the US or Europe.
A spat in the City over when it should cut settlement times for trades is the latest example of this tug of war. Accelerating settlements was part of the government’s “Edinburgh reforms”. These were designed to boost the competitiveness of the UK’s financial markets. Cutting the time between execution and settlement improves capital efficiency. Any procrastination will bring its own problems.
The US will go ahead, moving to next-day settlements by May. The EU has recently launched a consultation on the subject and will take longer to follow suit. A UK task force appointed by the Treasury struggles to agree on a timeline. As yet unquantified investments required in operational systems is one concern.
Yet byzantine settlements have a cost, too. Longer time between execution and settlement increases risk that one side of the trade will back out. An assumed global failure rate of 2 per cent equates to costs and losses of up to $3bn a year, according to the Depository Trust & Clearing Corporation. The EU equity settlement failure rate was 6 per cent last year.
Operators must offset that risk by depositing a percentage of the trade’s value with clearing houses. In this era of one-click transactions, a convoluted two-day process lacks digitised efficiency.
Whatever timeline chosen, the UK will be out of sync with counterparties in Europe or the US. This is not helpful for cross-border transactions. Redemptions for a mutual fund traded in the US, with underlying securities in the UK, will need clearing in a day. Underlying share sales would take two.
There is another reason for the UK to get cracking. Quicker settlements mean lower trading costs. The US already has the world’s most efficient financial system. A advance widening of its guide will only mean more heartache over London’s wilting equity market.
