The European Securities and Markets Authority (ESMA) has refused requests to amend UCITS rules despite industry concerns regarding potential breaches under a T+1 misalignment. Calls for action stemmed from worries that exchange-traded funds (ETFs) might infringe investment deposit and temporary borrowing limits.

The concerns were raised in response to ESMA’s consultation on shortening Europe’s settlement cycle. With less than two months to the shift to T+1 in the US, industry figures urged ESMA to intervene, citing heightened risks of settlement fails and advocating for a temporary suspension of the Central Securities Depository Regime (CSDR).

The authority does not share the industry’s concern for investment deposit limits. It clarifies in a feedback statement that UCITS rules allow a 20 per cent limit for investment deposits with the same body, with no explicit quantitative limit for ancillary liquid assets. “In light of this, ESMA does not see any obstacles in the EU legislation for UCITS to deal with the expected change of the settlement cycles to T+1 in the US”, the authority states. 


Breaching borrowing limits

Additionally, industry voices highlighted potential borrowing limit breaches due to the misalignment, emphasising the necessity to manage the settlement discrepancies that can exacerbate the funding gap.

ESMA stated it does not find sufficient evidence to argue that legislative changes to the existing temporary borrowing limits of 10 per cent are needed. However, they “will keep monitoring market developments and consider whether any actions or guidance are needed to ensure supervisory convergence”.

Similarly, ESMA dismissed calls for a CSDR suspension, asserting that ETF shares in US securities settle before delivery or redemption to and from investors, minimising settlement fails.

ESMA will publish a report required by the CSDR Refit on shortening the settlement cycle in Q3/Q4 2024, ahead of the legislative deadline of 17 January.