Q4 of 2027 is when the EU should move to T+1 – this was the popular opinion in a poll carried out during a recent online hearing organised by the European Securities and Markets Authority (ESMA). According to a Markets Media report, out of the 500 participants who attended the virtual event to discuss the shortening of the settlement cycle in the EU, 70 per cent indicated the end of 2027 as the preferred deadline for migration.
In addition, participants “stressed the importance of the EU migration being coordinated with the UK and Switzerland”. Q4 of 2027 is seen as a realistic deadline that matches recommendations from the UK government, following an analysis carried out by its Accelerated Settlement Taskforce.
Based on his experience with T+1 transition in the US, Gary Gensler, chair of the US Securities and Exchange Commission (SEC) has highlighted to the UK government “the importance of setting a date for the transition, which does not change, as well as having a well-thought-out timeline and schedule”. According to Gensler, there is public good in regulators setting a clear mandate as it better allows market participants to organise.
Rodrigo Buenaventura, chair of Spanish regulator CNMV and chair of ESMA’s markets standing committee pointed out that the post-trade landscape in the EU is more complex than in the jurisdictions that have transitioned to T+1 so far, but acknowledged that the migration is inevitable.
Issues of misalignment
One of the main issues that has risen from the misalignment of settlement cycles between the EU and the US is the “Thursday syndrome”. This refers to the phenomenon where it is more expensive to trade US ETFs on Thursdays and hedge the underlying basket, which settles T+1 on Friday. This requires three additional days of funding that covers the weekend, where overnight interest rates in the US are more than 5 per cent.
Markets Media quotes Jim Goldie, head of ETF capital markets and indexed solutions, EMEA at asset manager Invesco, who says, “We have created a dynamic where it’s more expensive to trade depending on the day of the week,” and that “We also see a dynamic where brokers will show one price to a client trading T+1, and a more expensive price to a client that has to trade on a T+2 basis.”