Now that we are in 2024, the shift to T+1 in the US looms ever closer. Bryan Pascoe, chief executive of the International Capital Market Association (ICMA) opened the year with an opinion piece for The Banker, where he lined out the challenges that markets in the EU and the UK might face should they attempt to shorten the settlement cycle. Depending on the desired outcome, he wrote, T+1 might not be the way forward.
Although “the imminent US move has set the wheels in motion in Europe”, and alignment with the US might be beneficial, Bryan Pascoe is of the opinion that “it could be more important to assess the fundamental stand-alone case by jurisdiction, and also for the EU and UK to be aligned given the very high transaction volumes and integration between the two markets”. Misalignment is likely to have more negative effects the greater the degree of interoperability.
The fragmentation in the EU market is a point that is frequently brought up when discussing obstacles to T+1 adoption in the bloc. Bryan Pascoe mentioned the same, but pointed out that there might be another reason to hold back on the transition: the opportunity costs.
Prioritising T+1 would put other “more forward looking projects”, such as T+0 and instantaneous settlement, on the backburner. Far from being a stepping stone, T+1 would actually be a hindrance to these projects because they “require a fundamentally different market (infra)structure and technology”. This, he pointed out, “stands in contrast to the overhaul and modernisation of existing post-trade systems and processes for T+1”.
In conclusion, “the key question for the industry and regulators is about priorities and the future direction of travel, and where the real benefits are expected to emerge”.