”As things stand, T+1 in Europe is much more likely to result in exceptions and increased trade disputes,” predicts James Pike. In an article for The Trade, the interim CEO of post-trade resolution network Taskize cautions that the transition to a shorter settlement cycle in Europe is unlikely to go as smoothly as it did in the US.
The fragmented nature of European markets is perhaps the biggest hindrance to a smooth transition – “a coordinated shift alone will not suffice,” writes Pike.
Unlike the US, which has the Depository Trust and Clearing Corporation (DTCC) serving as its single CSD, “Europe has multiple CSDs across different countries, each operating under its own rules and systems”. Shortening the settlement cycle in Europe thus requires not only coordination between market participants, but also between the different CSDs, “adding another layer of complexitiy to the transition”.
In addition, while in the US, all securities trades settle in the US market infrastructure, market participants in the EU often experience trades where the buyer and seller are operating in different countries with different CSDs.
Communication is key
“Any misstep or delay in trade confirmation and matching in these scenarios is highly likely to lead to an increase in settlement failures and disputes,” writes Pike. However, achieving seamless communication in a fragmented market “will be challenging”.
If Europe were to have any hopes of moving to T+1 within the next few years, authorities “must prioritise this transition and address the underlying issues that could impede it”, Pike advises. Probable measures include agreeing more of the post-trade components at the point of trade and using faster dispute resolution mechanisms to ensure clearer communication between the different parties involved in the trade.