“Rates of equity trade failure vary significantly
across the European markets. These
“fail rates” and the resulting costs provide opportunities for
broker/dealers to make significant cost savings in all markets”, reports a
recent survey carried out by Z/Yen, the City-based consultancy firm.
Individual market characteristics, good market practice and the strength of
local relationships tend to drive high rates of settlement performance rather
than the systems or managerial approach of any particular bank.
Funding and rectifying a failed trade costs an average
of $50 - $75. With fail rates
approaching 15% in some markets, the actual cost of fails, and therefore
potential savings, will be millions of dollars for most investment banks.
Z/Yen surveyed 6 major investment banks as to their fail
rates in the 3rd quarter of 2002, in the following markets: UK,
Germany, Euronext (France, Holland, Belgium), Italy, Switzerland and Spain.
The banks provided fail rates for on-exchange trades, OTC trades with
brokers and OTC trades with clients (allocations).
The survey also found that high volumes of
exchange-traded transactions do not necessarily produce low fail rates.
Also, netting on exchanges did not significantly reduce fail rates. Overall, Germany had the highest fail rates, followed by the UK, then Euronext. Switzerland and Italy had the lowest rates. (See table below.)
In the OTC market, the differences between markets are
less pronounced, although Belgium and Germany have significantly higher fail
rates. For client trades
(allocations), only Belgium had significantly higher fail rates than the rest of
Europe, while the UK was the most efficient. (See table below.)
Average
Fail Rates
| |
UK |
Germany |
France(Euronext) |
Holland(Euronext) |
Belgium(Euronext) |
Italy |
Switzerland |
Spain |
|
Exchange Traded |
5.3% |
8.4% |
2.6% |
2.6% |
4.1% |
0.4% |
1.2% |
0.0% |
|
OTC Broker Trades |
6.0% |
9.6% |
3.9% |
5.1% |
7.9% |
3.0% |
4.5% |
3/3% |
|
OTC Client Trades |
2.9% |
6.0% |
4.8% |
6.4% |
14.6% |
3.4% |
5.0% |
7.7% |
Jeremy Smith, a
Director at Z/Yen, said, “Initiatives to improve rates of STP have
historically been based around significant capital investment in infrastructure,
however, good relationships with local exchanges and counterparties and adoption
of “best-practice” appears to be one way to improve efficiency and reduce
cost at a much lower expense.”
For
further information, please contact Jeremy Smith, tel: (020) 7562-9562,
e-mail: jeremy_smith@zyen.com.
Z/Yen
specialises in risk/reward management, an innovative approach to improving
organisational performance. Z/Yen’s
clients include blue chip companies in banking, technology and professional
services as well as charities and care organisations.
