CMI in Focus - Partial Settlement

Partial settlement is an important feature of the settlement process to mitigate liquidity risk. It allows the settlement of part of a trade in case of a shortage of securities on the intended settlement date and, therefore, reduces the value at risk of failure. This process can be complementary to the shaping which splits settlement instructions into lower quantities.

General Description

The purpose of partial settlement is to settle part of a settlement instruction when full settlement is not possible due to lack of securities. The residual part of the settlement instruction may settle at a later stage, either on the intended settlement date or after, as part of the fails management procedure. As a result, partial settlement is an essential function to reduce fails. Markets where it is allowed are expected to have higher settlement rate than those markets that do not allow it.

There are different models of partial settlement, the most efficient one being a fully automated process whereby the settlement system automatically splits the instructions and settles part of the trades, for example, in Brazil and Hong Kong. In Hong Kong, partial settlement is actually mandatory for CNS (continuous net settlement) trades with automatic settlement in the following batch. There are other models whereby the authorisation of both parties, and sometimes the CSD (Central Securities Depository), is needed and specific instructions have to be sent, for example in France, Belgium and Norway.

In Italy, a shaping functionality is also available whereby the CSD automatically splits the failed transactions into a number of smaller trades.

Market Comparison

The chart below shows where partial settlement is practised out of 105 markets covered: 14 markets in Africa, 20 in the Americas, 17 in the Asia Pacific region, nine in Eurasia, 14 in the Middle East and 31 in Western Europe, including the European Union.

Partial settlement: comparison per region

The chart shows that partial settlement is not practised (and most of the time not allowed) in regions where frontier and emerging markets are in the majority. This is mainly because many of these markets use pre-funding models which prevent a shortage of securities during the settlement process and, therefore, partial settlement is not applicable. It should be noted that most markets allow partial buy-ins, even if partial settlement is not allowed.

Partial settlement is more common in Western Europe and Asia Pacific where half of the markets allow it. Even in the most developed markets, however, it is rarely used, probably due to the fact that the process is not automated and instructions need to be sent.

Conclusion

Partial settlement is an important mechanism to optimise settlement but it is still non-existent in many markets. For those where it is possible, the process is rarely automated which does not encourage its practice. The issue is expected to be addressed as automated partial settlement is to be introduced in some markets, particularly in Europe. The Polish CSD, KDPW, is expected to introduce it later this year and the function will be available in TARGET2-Securities (T2S), the new European securities settlement engine, where an ‘indicator’ (Yes or No) will be offered to participants to flag instructions automatically eligible for partial settlement.

For further information contact:

Guillaume Viteau
Senior Analyst, Capital Markets
Thomas Murray Data Services
+44 (0) 20 8600 2300
gviteau@ds.thomasmurray.com

Jim Micklethwaite
Director, Capital Markets
Thomas Murray Data Services
+44 (0) 20 8600 2309
jmicklethwaite@ds.thomasmurray.com

Tags: CMI in FocusCSDSettlementPartial Settlement