DEEP LOOK | Having discussed some of the complexities involved in making an assessment of T+1 costs in North America in the first part of this series, we now look at the key role post-trade technology will play in minimising the bill for European firms – and ask whether shorter settlement will release significant volume of margin due to lower counterparty risks.
Click here for part one of the article.
A new report from Firebrand Research has suggested that Europe’s transition to faster settlement will cost European custodians several times more than their US counterparts. Those interested in finding out more about the preparatory phase should check out Scott Schroenn’s PostTrade 360° 2025 session.
“That estimate doesn’t sound unreasonable based on the presence of multiple venues to settle securities – a scenario that doesn’t exist in the US where they all settle in DTCC,” says James Pike, chief revenue officer Taskize. “That is before you consider that the security could be delivered to any one of a number of CSDs.”
Varying levels of maturity
There is also varying levels of maturity in each EU member’s capital markets, requiring custodians to carefully consider specificities when planning for T+1.
Complexity rises further when the fact that Europe operates across multiple currencies is taken into account. Julia Romhanyi, global head of securities services at UniCredit adds fragmentation of Europe’s capital markets when it comes to post-trade services (especially corporate action management) and the large proportion of trades conducted cross-border to the list of complicating factors.
“We have already started to enhance our processing time for reconciliation and new securities adaption to ensure that all processing will be done during the day rather than in overnight batches,” she says.
However, Duncan Carpenter, director of product at Pirum, suggests that the key message for custodians is that T+1 is only a challenge if you are trying to solve it with yesterday’s technology.
“The question isn’t whether to automate as that is a minimum,” he says. “The question is whether your automation partner can deliver true global, real-time capabilities that make geography and time zones irrelevant.”
Trade and FX cycle automation takes priority
Northern Trust’s advice (which it is also following internally) is to focus on inserting as much automation into the lifecycle of the investment decision as is possible with particular focus on the trade and trade-related FX cycle.
Eric Derobert, group head of public affairs at CACEIS observes that some companies will be in a position to meet the new time constraints by leveraging a follow-the-sun set-up, with entities located in various time zones around the globe enabling 24-hour processing.
The cost pressure on the buy-side and the hindrance of longstanding legacy systems that go beyond the main focus of the US move (which was mainly the equities settlement process) have to be considered says Silvia Sancin, senior custody solutions manager, securities services at BNP Paribas.
“Areas like FX, corporate actions management and securities lending recall need to be at the heart of the analysis to be carried out for spotting impacts, regardless of where investors are based,” she says.
Tight deadlines call for immediate action
The investment required goes beyond simple technology upgrades. European firms need comprehensive modernisation including implementation of real-time trade matching, enhanced data exchange capabilities and API-based connectivity, suggests Pirum’s Carpenter.
“ESMA’s three-phase implementation timeline reflects this complexity,” he adds. “Technical solutions must be finalised by Q3 2025 and industry implementation completed by Q4 2026, followed by testing throughout 2027. So there isn’t much time to lose for those who still rely on manual touchpoints in their settlement processing.”
A shorter settlement cycle demands more granular visibility into post-trade activity, built upon significant upgrades in infrastructure, onboarding and integration capabilities, observes Basu Choudhury, head of trade lifecycle strategy at OSTTRA.
“Transitioning away from legacy systems toward a more unified, tightly integrated platform will require considerable investment in automation, system modernisation and connectivity,” he adds.
Differences in transactional processes
Transactional processes also differ. The US is very driven by affirmations whereas in Europe the additional confirmation and instruction steps add complexity.
As a result, there are more varied data points to reconcile, including PSET and SSIs, says Daniel Carpenter, CEO of Meritsoft, who will be discussing this topic at PostTrade360 2025. “European markets also come with a range of technologies, market cut-offs and disparate datasets, which all need consolidating in near real-time to meet T+1 requirements,” he adds.
Most observers believe the long-term benefits of automation – such as reduced operational risks and improved settlement efficiency – make it an essential investment.
“Automation and centralisation of settlement activities offers improved data access and insights and the ability to predict and manage settlement fails,” says Meritsoft’s CEO. “Visibility of all the relevant data in real-time can help identify at-risk trades and predict which counterparties may be more likely to fail during certain times of the day or in specific securities.”
Firms can use this data to address systemic issues and strategically plan which counterparties to trade with for higher success rates.
Same day matching seen as key benchmark
Same day trade ‘matching’ will be the key deliverable for all trading parties observes Adrian Whelan, managing director and global head of market intelligence for investor services at Brown Brothers Harriman.
“Same day match rates are already reasonably high for the largest European markets,” he says. “However, industry analysis shows that some geographies have work to do, some asset classes (fixed income, for example) are lower than for equities and there could be a long tail of smaller firms whose current trade allocation processes are done via fax, email or Excel spreadsheets.”
Even early stage automation can be foundational in the further evolution of more intricate automation processes down the line, suggests Dave Cosgrove, head of operations US & LATAM, MarketAxess Post Trade.
“There will always be a need for skilled operatives in operations but their time is better spent on valued added functions that avoid and/or reduce risk to the firm and its clients,” he says. “An important additional detail to note is that you can only be as automated as your most manual client.”
Systems consolidation may lower long-term costs
Given the current European market infrastructure landscape, firms are likely have multiple systems focused across multiple markets so the cost of automation will be higher if applied across the existing infrastructure, explains Mack Gill, head of securities processing at FIS.
“The alternative to that approach – and one firms must also consider – is to opt for a common technology platform that can cover the needs of multiple European infrastructures,” he says.
Inventory realignment: the buy-side challenge
European counterparts will also need to think carefully about how they align their inventory with what they are trading day in day out and have the tools to dynamically manage their settlements versus the inventory.
“If a buy-side firm wants to execute a sell or reduction of one of its positions, there is very little linkage back to what it is physically being held because both buy and sell-side firms have to manage their inventory across many different venues (depots and multiple custodians),” says Pike. “It is tough to manage this versus the daily settlements occurring in terms of managing the inventory.”
Buy-side firms could have hundreds of different positions in the same security across multiple custodians. When they do a sell order, they will work out where they are going to sell it from afterwards and at that point will need to go and get that inventory and then instruct the market via the custodian to deliver it to the broker-dealer.
This creates an inventory realignment challenge in terms of how they match, and subsequently how they manage exceptions in the context of the end-to-end settlement process. Firms will need to develop tools to enable timely collaboration and resolution of queries and exceptions from the point of execution all the way down to physical assessment of the trade and its associated breakage points in the settlement journey.
For more information on execution, check out Jaime Healy-Waters’ session as part of the T+1 track.
Smaller players face bigger automation gaps
“How they connect these processes through query management whilst improving the upfront trade data standards to automate/eliminate post-trade issues through a richer set of execution messages on the trades is important and will therefore lead to fewer exceptions at the back end of the process,” says Pike. “But where exceptions arise, query tooling will be of paramount importance.”
Michele Pitts, global product head of transaction management at Citi Investor Services says the higher average price tag for European custodians referenced in the Firebrand Research report may be attributed to smaller custodians and market players that have not had exposure to the US and are therefore more focused on markets that have sizeable gaps in terms of automation.
Marcello Topa, director, global market advocacy, policy and strategy at Citi Investor Services acknowledges that European custodians operate in a fragmented market but also that a number of markets already share a common infrastructure and settlement platform targeted to securities, which will hopefully help in reducing T+1 transition costs.
“However, while large players that are active in T2S as a directly connected party have embraced the harmonisation standards that the platform brings, medium-sized institutions that are still indirectly connected via their local CSDs or custodians may face greater complexity,” he says.
Margin release: a promising incentive
Cosgrove describes the release of significant volume of margin due to lower counterparty risks as the ultimate driving force behind the move to T+1, although Gerard Walsh, global head of client solutions, banking and markets at Northern Trust cautions that there is as yet insufficient data to understand whether the forecasted margin release is happening in North America.
“The amount of time from execution to settlement is all about the risk and the key way to reduce risk is for larger margin deposits,” says Cosgrove. “We saw a reduction in the US when T+1 came into effect and that capital is now available to businesses to deploy in more meaningful ways.”
The reduction of positions results in significant initial margin reductions across bond and equity markets, freeing up liquidity for clearing participants active on these markets says Derobert.
“Simulations performed by CCPs show margin reductions due to T+1 across all relevant products amounting to 42% of margin requirements, which could represent some €2.4 billion that the relevant CCPs would not call on a daily basis in a T+1 environment,” he notes.
Gill agrees, referring to the creation of a virtuous liquidity cycle, while Francisco Béjar Núñez, head of CSD services at SIX refers to comments from former SEC chair Gary Gensler that T+1 created a 25% reduction in collateral after the US go-live.
“While there are differences between the US and Europe, a similar level of savings could be achieved here once Europe completes its transition to T+1,” he concludes.
Have you signed up yet to be in Stockholm for PostTrade 360° 2025 on 3–4 September? It’s free for securities operations pros, both trading and investor sides! (Vendor firm representatives need a sponsorship agreement.) The powerful event website lets you register, see all other delegates, schedule sessions and meetings, and message. Find all related articles, including loads of teaser interviews, here.
