Verena Ross, the chair of the European Securities and Markets Authority (ESMA), delivered a speech at a public hearing regarding the possibility of shortening the settlement cycle in the European Union to T+1, aligning it with the US. This shift would significantly affect how quickly securities are delivered and paid for after a trade is agreed upon.
The current settlement cycle in the EU is T+2, meaning that settlements take place two business days after the trade date. The US, along with Canada and Mexico, transitioned to a T+1 settlement cycle on May 28, 2024, prompting the EU to consider a similar change to remain competitive in the global financial market.
Ross highlighted the growing importance of shorter settlement cycles, citing positive experiences from jurisdictions that have already adopted T+1. She acknowledged the complexities involved in achieving this within the EU’s financial market structure but emphasized the potential benefits. The public hearing served as a platform to discuss these challenges and opportunities with stakeholders in the industry, she said.
Highlights from the speech
- All actors along the trading and post-trading chain will have to adapt in order to meet tighter deadlines not only in relation to trading but also for other more complex activities, such as securities lending, repos and FX trading. Ross said: “Time is risk and time is money.” The compression of the settlement cycle will imply a reduction of the risk in the system, which should translate into lower margin requirements.
- Some jurisdictions have already moved to T+1 and the EU’s strong interconnections with some of them, in particular the US, means that many EU stakeholders now have to deal with misaligned settlement cycles. This brings complexity, costs, and risks. “Our markets are strongly interlinked and a misalignment in the settlement cycle between the UK, the EU and Switzerland could be damaging”, said Ross.
- The process to get to T+1 in the EU will be complex. It will likely require changes in the Central Securities Depositories Regulation (CSDR), in existing Level 2 regulations and potentially further regulatory guidance. It will also require the industry to work together to find solutions to some of the identified challenges and put them into practice through market standards.
- ESMA recognises the “successful international experience” towards a shorter settlement cycle, with positive outcomes from those who are already operating on T+1.
What next?
ESMA will submit its report on T+1 to the European Parliament and the Council of the EU at the latest by mid-January 2025, as required by CSDR Refit. While ESMA finalises it, it will continue its engagement with all stakeholders to ensure everyone is ready for the moment when a decision is taken and the “go” is given.
GRIP comment
There are several potential benefits to the EU moving to a shorter settlement cycle:
Reduced risk: Shortening the settlement cycle reduces the amount of time that trades are exposed to counterparty risk, which is the risk that one party to a trade will default on their obligation.
Increased efficiency: A T+1 settlement cycle can lead to increased efficiency by reducing the amount of capital that needs to be tied up in collateral requirements.
Improved liquidity: Shorter settlement cycles can improve liquidity by making it easier for investors to settle trades quickly.
Alignment with US markets: Moving to T+1 would align Europe with the settlement cycle in the United States, which could make it easier for European investors to trade in US markets.
While the EU considers adopting T+1, the UK is also contemplating a similar move but with its own timeline. The previous UK government published a report by the Accelerated Settlement Taskforce in March 2024, recommending a shift to T+1 by the end of 2027. This suggests the UK might align with the EU in the future, but the specific timing remains to be determined.