On 18 November 2024, the European Securities and Markets Authority (ESMA) submitted an impact assessment report on the EU’s move to T+1 to the European Parliament and Council. In it, the organisation recommends that the bloc moves to a shorter settlement cycle on 11 October 2027 using a three-phase approach. Deutsche Bank gives a detailed overview of the transition in its publication, Flow.
“The roll out of T+1 in the EU carries obvious logistical challenges”, states the article. The main culprit is the fragmentation within the region, with 27 member countries using multiple currencies and depositories, run by different jurisdictions. Add to this a desire to coordinate the move with Switzerland and the UK, the two major markets in the region outside of the European economic area, and the challenge only intensifies.
The time crunch
Foreign exchange (FX) forms a concern. Deutsche Bank quotes a SWIFT study from June 2023 that estimates that due to time zone differences, bankers and brokers in Europe will have approximately 80 per cent less time to manage cross-border settlements under T+1 – and this is before taking into account the 50 per cent reduction in time from halving the settlement cycle.
A white paper published by Flow last year titled “Breaking the settlement failure chain” identified settlement compression as “an aggravating factor when it comes to the risk of trades failing”. With less time to complete settlements, it is likely that technology systems and the upstream operational processes that support securities settlement will feel the heat. Failed trades spell fines and increased costs for market participants.
Slow and steady
ESMA’s three-phase approach comprises finalisation of the definition of solutions to technical challenges by Q3 2025, industry implementation by end of 2026, and testing, including allocation, confirmation, and matching on T0 before the T+1 go-live date of 11 October 2027.
Amendments can be expected to the Central Securities Depository Regulation (CSDR), where it mandates that the settlement of transactions in transferable securities traded on a trading venue should be completed “no later than on trade date plus two”. ESMA proposes that this should be corrected to “no later than on trade date plus one”. A temporary suspension of cash penalties for settlement fails following the transition should also be considered.
Delayed gratification
David McNally, Deutsche Bank’s head of transformation, securities services encourages market participants to shoulder the short-term cost of investing in post-trade process automation for long-term gains. “Investing in technology, including artificial intelligence, in order to meet T+1 requirements will lead to increased operational efficiencies and less human error. This can only be a good thing when it comes to lowering the risk of trade fails and subsequent financial penalties.”
