Negotiated ETF Settlement Dates Could Cut Fails

Home


Written by Mark M. Johnson
Tuesday, 20 December 2011

The high level of settlement fails in the ETF market could be cut down if buyers of the securities took ownership on trade date and settlement dates were negotiated, according to Fred Sommers, president at OpsRisk Limited and partner at the Basis Point Group, who spoke at Finadium's 2011 Conference.

The issue of the high number of fails attributed to ETF transactions was raised last November with a report about systemic risk posed by the trades. It was raised again in March, with a report that indicated approximately 60% of settlement fails in equities reported to the SEC are due to fails in ETF trades.

In responding to a question about how to change the settlement process, Sommers told attendees that one way would be to grant ownership of the ETFs to buyers immediately after the trade is agreed on trade date. The counterparties could then negotiate a settlement date, "because in effect, that is what is happening now," he added.

"That way, it's either fill it or kill it -- it happened or it didn't happen. And it would make contract law match regulation," Sommers said.

That would allow the new owner to trade or lend that security just as they would post-settlement under today's regime. Additionally, he noted that under that regime, counterparties could also end up with more netted positions between them, which would eliminate the settlement process altogether.

Eric Pollackov, managing director of ETF Capital Markets at Charles Schwab & Co, said his solution would be to change the way settlement fails are tracked.

He pointed out that regulators consider a trade failed if securities and payments are not delivered by T+3, even though market makers have traditionally had longer to deliver--market maker rules mandated delivery by T+13 until 2008 when it was changed to T+6 post-Lehman Brothers' bankruptcy. He pointed out that the discrepancy significantly increases the likelihood that a trade would be considered failed even if all parties abide by their set rules.

Last Updated ( Tuesday, 20 December 2011 )

Login Form

Syndicate

InjuryPersonalSettlement.com