France’s financial markets authority, Autorité des Marchés Financiers (AMF), and Banque de France have released a joint paper focused on the EU’s move to T+1. The report suggests a two-phased approach to the transition, taking into account the timeline proposed by the UK’s Accelerated Settlement Cycle Taskforce, and the European Commission’s recommendations.
Calling a two-phased approach “the most pragmatic way forward”, the paper emphasises that “improving settlement efficiency should be a priority and a mandatory condition prior to any reduction of the settlement cycle”. Thus, the first phase should be achieved before moving on to the second phase.
The EU’s transition to T+1 should also be coordinated with the UK and Switzerland. “Such a coordination should start as soon as possible”, given the ambitious timeline set by the UK to move to T+1 by the end of 2027.
Taking first steps
For first phase, the report suggests that the industry aims to confirm or allocate trades “as soon as practicable and no later than on trade date”. This entails improvements in standardisation of market practices in the EU, settlement of cross-border transactions, and settlement of ETF shares. In addition, “it will also be necessary to ensure that the T2S operator has sufficient time to prepare for the settlement of an increased volume of trades during the real-time settlement period, and for the postponing of the night batch settlement”.
To achieve the above, the European Commission should set up working groups with “all stakeholders and on all relevant topics”.
Last, but not least
The second phase involves the shift to T+1. The paper cautions that “the scope of the T+1 rules should be carefully designed in order to ensure that it will not reduce the appetite of foreign investors for EU products”.
It points out that there are “many ways to implement a shorter settlement cycle”. Beyond setting up a mandatory cap, incentive measures or tools are viable options. Transitional measures, especially the cash penalties mechanism under the Central Securities Depository Regulation (CSDR), should be considered.
Not a clear path
To conclude, the report highlights a key obstacle: the compression of the settlement cycle would mean that “all the steps between the execution of trades and the settlement should be enhanced and automated where possible”. There is currently, however, “no real EU service offer” that enables the automation or speeding up of the confirmation and allocation process, so this is an area of development that requires work.
