”Time is risk and time is money,” says Verena Ross. At the recent public hearing discussing the shortening of the settlement cycle in the EU, the chair of the European Securities and Markets Authority (ESMA) presented a number of key points about T+1 transition in her introductory remarks.
The shortening of the settlement cycle will represent a significant change in the way markets operate, not only at all levels of the value chain, but also in all activities, says Ross. This means tighter deadlines even for more complex activities, such as securities lending, repos, and FX trading.
Despite the tighter deadlines for these activities, the compression of the settlement cycle is expected to reduce risk in the system, because in settlement, “time is risk and time is money”.
Misalignment is risky
Due to the EU’s “strong interconnections” with some jurisdictions that have already moved to T+1, “in particular the US”, many EU stakeholders are now experiencing the complexity, costs, and risks of misaligned settlement cycles, Ross points out. This is especially true for ETFs invested in securities in jurisdictions that are already on T+1, and for issuers who are looking for funding in both the EU and the US.
Transitioning to T+1 means better operational efficiency, lower risks, lower margin requirements, and international realignment – all factors that would contribute to the competitiveness of EU markets.
A complex journey
Ross acknowledges that “the process to get to T+1 in the EU will be complex”, due to the fragmentation of the region’s markets. She predicts that it will require changes in the Central Securities Depositories Regulation (CSDR) and “potentially further regulatory guidance”.
In addition, she recommends that the transition in the EU be done at the same time as the UK and Switzerland. Misalignment between the three territories “could be damaging”.
Although the EU “has very specific characteristics” so the experiences of other jurisdictions may not always be transferable, Ross believes that there is still value in understanding what has worked and taking lessons from those who have already gone through with the transition to “ensure that an EU shift will be successful”.
