Kauffman Foundation News (3/1/11): Securities Settlement Failures Signal Systemic Risk, Kauffman Paper Warns
Rise in Securities Settlement Failures Shows Some Traders Game System, but Failed Settlements Also Can Signal Systemic Risk
Kauffman paper urges regulatory crackdown on traders who boost profits by failing to honor legal obligations
A large and growing number of securities transactions that fail to settle indicates a possible lapse in regulatory oversight and poses a potential liquidity risk that can lead to a future systemic crisis, according to a new report issued today by the Ewing Marion Kauffman Foundation. The report urges a tough regulatory crackdown, including substantial financial penalties for settlement fails.
According to the report, every fail introduces a cumulative and potentially compounding liquidity risk into the orderly process of settling the $7.5 trillion of security transactions completed each day. It goes on to say that the failures are at least partly attributable to gaming of the system by traders who use delay to generate additional profit.
Harold Bradley, Kauffman’s chief investment officer, and Robert Litan, Kauffman’s vice president of research and policy, co-authored the paper with Robert A. Fawls and Fred E. Sommers, partners at Basis Point Group, a leading financial markets research firm based in Massachusetts.
