Securities finance gets EU T+1 exemption, but there’s still work to do

DEEP LOOK | While certain securities financing transactions are exempt from the shortened settlement cycle, how is remaining regulatory ambiguity weighing on these market infrastructure products and how would greater clarity help?    

In September, the European Parliament confirmed that documented securities financing transactions such as securities lending, buy-sell back or sell-buy back transactions and repurchase agreements would be exempt from T+1 settlement when it comes into effect in Europe in October 2027.

This had been one of the key objectives of the International Capital Market Association, with its European Repo and Collateral Council strongly advocating for such an exemption since by their nature securities financing transactions do not have a standard settlement cycle and require full flexibility for firms to agree settlement dates.

Rui Ferreira, securities processing product manager at FIS refers to broad agreement among regulators and market participants in both the European Union and the United Kingdom on the need to exempt certain securities financing transactions from the move to a T+1 settlement cycle.

This consensus is based on the recognition that the operational and legal structure of securities financing transactions such as repos and securities lending makes them particularly challenging to settle on a shortened cycle.

In the UK, the Financial Conduct Authority (FCA) has accepted all recommendations of the Accelerated Settlement Taskforce, which explicitly included the exemption of these transactions from the T+1 requirement. This aligns with industry feedback on the practicalities of securities financing transaction settlement.

In the US, a number of instruments are exempt from a T+1 settlement requirement. These include government securities, municipal securities, commercial paper, bankers’ acceptances, commercial bills, security-based swaps and firm commitment offerings priced after 4:30 pm Eastern Time.

“Market participants widely support these exemptions as they reflect the unique considerations inherent to these instruments,” observes Joris Capeau, senior solutions consultant, global sales at Finastra. “The approach aims to balance the benefits of a shortened settlement cycle – such as reduced counterparty risk and enhanced market efficiency – with the practicalities of existing market infrastructure and global settlement conventions.”

Key questions to resolve

In the EU, the European Council has supported a securities lending exemption with a specific clarification, explains Ferreira. “The exemption applies only to transactions documented as single transactions composed of two linked operations,” he says. “While this aims to ensure the exemption is applied only to genuine securities financing transactions, it raises concerns about its effectiveness in the real world.”

According to Ferreira, a number of key questions remain to be resolved, including: what exactly constitutes a ‘single transaction’ in both legal and operational terms?; how does this impact documentation standards such as GMRA (global master repurchase agreement) or GMSLA (global master securities lending agreement); and how will this definition be interpreted and enforced consistently across EU member states and market infrastructures?

“We equally must factor in the operational complexity that accompanies the activity,” he adds. “Even when securities financing transactions are exempt, they are often closely linked to normal transactions – such as outright bond purchases or sales – that will be subject to T+1 settlement.”

This creates challenges for firms, including the coordination of the settlement deadlines between securities financing transactions and related transactions to prevent mismatches in settlement cycles that could lead to settlement fails or increased liquidity demands. For this reason, firms may still require accelerated recall procedures and changes to collateral management workflows.

Readiness essentials 

The critical point to aid this process is ensuring system and process readiness to handle both exempt and non-exempt transactions efficiently, without introducing errors or delays, says Ferreira.

“As a result, while there is general agreement in principle on the need for the exemption, the lack of detailed regulatory guidance (especially in the EU) means some uncertainty persists,” he adds. “It is still very important for market participants and industry bodies to continue to call for further clarification to ensure harmonised and effective implementation and to avoid fragmentation or unintended compliance risks.”

Simon Waddington, EquiLend’s head of post-trade & regtech solutions agrees that the securities finance industry still very much needs to prepare for T+1 as many securities financing transactions occur in response to transactions that will be in scope for faster settlement.

“Greater levels of automation and operational efficiency will be critical in order to respond to the significantly shorter processing timeframe,” he adds. The repo market and securities financing markets generally are operating on compressed settlement cycles relative to the underlying securities market already, agrees Jonathan Lee, Kaizen’s money markets reporting director. “Any further shortening – for instance, intraday or same day settlement – may prove unviable,” he says.

Calls for clarity

The other issue that has been raised during the discussion over whether specific securities financing transactions should be exempted from the shortened settlement cycle is the need for greater legal and regulatory clarity around these instruments, particularly in relation to the Central Securities Depositories Regulation or CSDR.

With industry changes as meaningful as the move to T+1, legal and regulatory clarity is always welcome to prevent ambiguity in implementations and market practices. This is particularly the case for the exemption of securities financing transactions from the shortened settlement cycle.

That is the view of FIS’s Ferreira, who notes that in the past the scope of CSDR as it relates to securities financing transactions was generally understood to be ambiguous by both industry groups and regulatory taskforces.

“The move to T+1 is an opportunity to provide much needed clarity and legal certainty,” he says. “Both the Accelerated Settlement Taskforce and the International Capital Market Association have explicitly called for greater legal and regulatory clarity around securities financing transactions. This includes clear definitions of which transactions are exempt, how documentation should be structured and how the exemption interacts with other settlement obligations under CSDR.”

Regulation an enabler

Clear and harmonised regulatory definitions are not only essential for compliance – they are also key enablers of automation, particularly in the context of securities financing transactions and their associated workflows. Ambiguity in rules and documentation standards can hinder the development of scalable, automated processes, increasing reliance on manual intervention and operational risk.

“By contrast, well-defined and consistently applied regulations support the integration of securities financing transactions into straight-through processing environments, enabling firms to streamline settlement, collateral management and exception handling,” adds Ferreira. “Regulatory clarity is critical to unlock the full potential of automation and ensure resilient, efficient market infrastructure.”

CSDR initially suffered from a significant lack of clarity around securities financing transactions, although some of this uncertainty regarding mandatory buy-ins was resolved by the CSDR Refit, which amended the regulation in relation to settlement discipline (including the pre-conditions for applying mandatory buy-ins) as well as the passporting regime, banking-type ancillary services, oversight of third country central securities depositories and cooperation between supervisory authorities.

“The main area of uncertainty remains settlement fail penalties, which has been an operational challenge in terms of passing those penalties down through the various participants in each transaction,” observes EquiLend’s Waddington. “ESMA published a final report in June 2025 which recommended narrowing the scope of cash penalties – potentially excluding certain securities financing transactions – but these changes have yet to be adopted.”

According to Capeau from Finastra, greater legal and regulatory clarity on securities financing transactions is essential as Europe prepares for the transition to a T+1 settlement cycle.

“Market participants have consistently highlighted that some securities financing transactions, such as repos and securities lending, are non-standardised and often require settlement timelines that differ from outright cash trades,” he says. “The lack of explicit, harmonised guidance within CSDR on how these instruments should be treated could lead to confusion and operational uncertainty.”

The practical impact of ambiguity

Capeau notes that regulatory ambiguity is not just a technical issue: it has practical implications for compliance, risk management and market efficiency.

“Without clear rules, there is a risk of inconsistent implementation across jurisdictions and even the possibility of driving activity away from regulated venues,” he warns. “That is why additional clarity and transparency will ensure a smooth transition, maintain market stability and support the competitiveness of European capital markets.”

Lee from Kaizen takes a slightly different view, suggesting that the industry standard repo and securities lending master agreements should provide all of the clarity and definition necessary to easily distinguish these instruments.

“Securities financing transactions act as market infrastructure products, performing a fails curing function and streamlining securities settlement such that to enact penalties for failing trade such as repos could have a detrimental effect on the overall functioning of the market,” he says.

The industry has been advocating that securities finance is part of the solution to settlement issues, so the adoption of the securities financing transactions exemption in the final text by EU ministers is a very welcome step, says Anna de Winton, product solutions manager, securities services at BNP Paribas.

“Not only is this in the best interests of investors but it also allows banks like us with multiple services and platform to provide necessary services like auto borrow to help with settlement,” she concludes.