“How long can we remain misaligned with the rest of the world?”

VIDEO | Efforts to align the European Union’s settlement cycles with global standards are gaining momentum, as highlighted by Gilles Hervé, Senior Policy Officer at the European Commission. Speaking during the session titled “What’s up next in the European Commission’s campaign for settlement discipline” at PostTrade 360° Nordic 2024, Hervé addressed the necessity of moving towards T+1 settlement—settling transactions one day after trading. He stressed that this change is vital for maintaining the EU’s competitiveness in global financial markets.

Hervé warned that the EU risks falling behind as international markets rapidly adopt shorter settlement cycles. In May 2023, North America moved to a T+1 settlement cycle, creating a misalignment with the EU’s current T+2 system. This divergence, Hervé explained, poses a significant threat to the EU’s financial sector, leading to increased costs and operational complexities for firms engaged in cross-border transactions.

“The impact of the misalignment will continue to grow for large parts of the EU financial sector,” Hervé cautioned. He emphasised that the longer settlement cycles in the EU could jeopardise the region’s standing in global capital markets.

To mitigate the costs associated with these discrepancies, Hervé suggested that EU firms adopt greater automation and modernise their operational processes. “Some challenges, like handling corporate actions across jurisdictions with different settlement cycles, require a common EU solution,” he said. Operational adjustments, such as implementing overnight shifts in Central Securities Depositories (CSDs) or hiring staff in the U.S., could help alleviate some of the immediate issues caused by the misalignment.

However, he pointed out that market participants have so far been unable to agree on a unified approach to these challenges, adding to the urgency of legislative intervention.

A coordinated move to T+1

While individual firms are free to transition to T+1 on their own, Hervé argued that a coordinated, EU-wide approach would be more effective. “Given the fragmentation of EU markets and the absence of consensus amongst the different sectors of the financial industry, it may be necessary to ensure that all participants embrace such a move in a coordinated manner,” he remarked

During a recent roundtable, Hervé reported, market participants overwhelmingly supported legislative measures to enforce T+1 across the EU. However, he clarified that the final decision would likely rest with the next European Commission.

International cooperation

Hervé also noted the critical role of the European Securities and Markets Authority (ESMA) in shaping the transition to T+1. ESMA has been tasked with evaluating the appropriateness of moving to a shorter settlement cycle and is expected to release a report by mid-2025. “It’s not a question of whether we will move to T+1, but how and when,” Hervé said, underscoring the importance of aligning with global markets.

He also highlighted the necessity of international cooperation, particularly with the UK and Switzerland, stating, “Our goal is to ensure that all jurisdictions are aligned when it comes to T+1.”

Balancing costs and benefits

While the shift to T+1 is widely viewed as inevitable, Hervé acknowledged that it would come with both costs and benefits. “But,” he concluded, “we need to ask ourselves not just about the costs and benefits of moving to T+1, but how long we can remain misaligned with the rest of the world”.

Speaker:
Gilles Hervé, senior policy officer, European Commission

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