January 2003
“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.)
| 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.