EU firms press for faster move to T+1 after smooth US rollout

Just six weeks after North American markets made the switch to T+1, the European Union is contemplating a timeline for its own transition. Heartened by the relatively smooth acceleration across the Atlantic, public authorities and market participants alike are keen to make the leap sooner rather than later.

Attendees at a public hearing on July 10 hosted by the European Securities and Markets Authority (Esma) were presented with a poll asking them to pick their preferred date for a move to T+1. The three options were Q4 2027, Q1 2028, and Q4 2028. The Q4 2027 option was chosen by 70% of respondents, with the next soonest date, Q1 2028, coming in second at 18%.

Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association (Efama), seemed to sum up the feeling in the room when he explained the changing sentiment among Efama’s membership. “The doubts of the fund industry have evolved over the last few months. While we took a fairly cautious approach to a possible move to T+1 in our response to the call for evidence at the end of last year, based on more recent discussions, we now see more and more of a consensus emerging within our membership on the need for the EU to move to T+1 as soon as reasonably operationally possible,” he said.

The mood was very different just six months earlier, when European Commissioner Mairead McGuinness first announced during a roundtable that “when it comes to T+1, the question is no longer if, but how and when it will happen here in the EU.”

Responding to that statement, Esma’s head of market and digital innovation said that McGuinness may not want to read some of the skeptical responses that Esma had received to its call in October 2023 for evidence on shortening settlement cycles.

Domino effect

The positive example of the US transition was a constant reference point in discussions of a coming EU shift at the Esma hearing. Efama’s Ingham told attendees that it had triggered a global domino effect, pushing Europe and other jurisdictions to prune their own settlement cycles. “I think the smooth transition that we have observed since the US migration to T+1 really served as a green light in many jurisdictions across the world to assess and implement their own migrations to T+1 settlement,” he said.

We now see more and more of a consensus emerging within our membership on the need for the EU to move to T+1 as soon as reasonably operationally possible

Vincent Ingham, European Fund and Asset Management Association

Ingham said 60% of global markets by capitalization are now on T+1. If the UK, Switzerland, Hong Kong, Singapore, and Australia all move to next-day settlement as anticipated, that figure will rise to 75%.

“With the rest of the world moving in this direction, the question is, how long can the EU afford to wait before committing to move to T+1 without appearing conservative and outdated in terms of technology processes and approaches to risk management, and therefore less attractive as a place to invest?” Ingham asked.

Data presented at the hearing by Val Wotton, managing director and general manager of institutional trade processing at the Depository Trust and Clearing Corp. (DTCC), showcased the positive outcomes of T+1 in North America. Affirmation rates, which were at 73% in January, were up to 94% in the first two weeks following T+1 go-live. Clearing fund requirements were down, with the National Securities Clearing Corp.’s clearing fund reduced by $3.6 billion, freeing up capital for member firms to use elsewhere.

“The entire globe was watching the North American T+1 implementation. If it hadn’t gone to plan, it would have likely given cause for other jurisdictions to pause,” DTCC’s Wotton tells WatersTechnology. “The key metrics evidence the successful move to T+1. And because a lot of the concerns that were raised before the transition did not transpire, the question now is, how quickly can other markets follow suit?”

As well as providing a reassuring example, the North American transition has also spurred talks of a European switch by creating a misalignment in settlement times between assets traded on either side of the Atlantic. This has caused a particular headache for asset managers, as the European fund management industry is more exposed to US equities than to any other single market. 

A slower settlement cycle for foreign exchange and internal fund redemptions means that money managers must settle North American transactions days before receiving the necessary funds on the European side. Efama’s Ingham says the misalignment is producing a substantial cost factor for the European buy side, deteriorating the performance of funds.

The mismatch is also causing difficulties for issuers, with dual-listed securities sometimes having different key dates in the two jurisdictions where they are listed. Jesús Benito, head of domestic custody and trade repository at SIX, explains that this can present more than just an administrative inconvenience.

Because a lot of the concerns that were raised before the transition did not transpire, the question now is, how quickly can other markets follow suit?

Val Wotton, DTCC

“Delays in distributing dividends or new shares can lead to missed investments for clients who rely on timely access to funds or shares. Inefficient handling of due corporate actions still operating on T+2 could also significantly damage a financial institution’s reputation, with clients and investors perceiving the institution as unreliable. This is particularly important to institutional investors because if a dividend payment is made after the end of the tax year, then this can have a knock-on effect on their tax liabilities,” he says.

If the US implementation represents a carrot for an expedited T+1 in Europe by demonstrating the potential for a smooth transition that reduces margin and back-office expenses, then the awkward and costly experience of misaligned settlement cycles is also a stick. Marcello Topa, director for Emea market policy and strategy at Citi, told participants at the Esma hearing that the direction of travel in Europe is very clear: “It is impossible to expect that we will continue to be misaligned with the US for a long time,” he said.

Over to EU

As part of its T+1 research, Esma sent 11 central counterparty clearinghouses (CCPs) a dedicated questionnaire, asking them to provide a simulation of margin costs under their T+1 and T+2 regimes.

The results, presented by Esma at the hearing, suggest that the estimated size of margin savings from a move to T+1 would be around €2.7 billion ($2.9 billion), with 80% of savings linked to cash equity markets and the remainder in bond markets.

But while the switch could offer big rewards, it also arguably poses a bigger challenge in the EU than in North America. Where Canada and the US each have a single central securities depository (CSD) and CCP, Europe’s post-trade landscape is fragmented and complex.

As a result, DTCC’s Wotton says, inventory management across the continent would need to be a priority in preparing for an accelerated settlement cycle. “In Europe, with multiple CSDs, you need to ascertain where the stock is held. Cross-border settlement is challenging, and it is amplified if there are timing issues that could lead to failures,” Wotton says.

Another potential complication for Europe is the intricate lawmaking process. Although participants from every corner of the market voiced a preference for Q4 2027 as the transition date, it will ultimately be a choice for the European Commission.

Commissioner McGuinness has suggested that the decision should be made by the new Commission being formed in the wake of June’s elections, not the outgoing body. The Commission president may be chosen as soon as the end of this week, so that may not seem like a long way off. But new governments are slow to get going at the best of times, and sources say that the decision could fall off the end of a long to-do list for the incoming Commission, with no final decision on a transition date expected this year.

With the clock ticking, market participants are wondering whether targeting a 2027 transition will be possible without an early decision by the Commission.

Q4 2027 is achievable if regulators, market participants and market infrastructures work together

Jesús Benito, SIX

Calls for alignment between the EU, the UK, and Switzerland could help expedite the process if the EU’s neighbors push for a speedy transition, encouraging the EU to fast-track T+1 through its lengthy law-making process.

“Q4 2027 is achievable if regulators, market participants and market infrastructures work together. The agreement from the panelists that it is preferential to have unity between the EU, Switzerland, and the UK on the timing for this move is very positive,” says SIX’s Benito.

Preparing the ground

While waiting for a decision on the implementation date, Esma can make a start on smoothing the path to a transition.

Although T+1 would require a change to the text of Central Securities Depositories Regulation (CSDR)—the regulation requiring that all transferable securities transacted on a trading venue be settled on T+2—public authorities have said that smaller technical tweaks to market structure could also help prepare the ground for an eventual switch.

Many of these changes could be made using “Level 2” legislation, which does not have to pass through the European Parliament or Council, and therefore requires less bureaucratic maneuvering than broader “Level 1” changes.

Sebastijan Hrovatin, deputy head of the Commission’s financial markets infrastructure unit, told attendees of the Esma hearing that there is no obstacle to Esma beginning work on measures to improve settlement discipline, such as mandating automatic partial settlement or requiring that transactions be confirmed, affirmed, and matched on trade date.

Other participants called on Esma to waive the penalties regime for failed settlement during the transition period, a suggestion that representatives of public authorities pushed back against at the hearing.

Market participants and market infrastructures have also called for the EU to consider expanding the maintenance window for Target-2 Securities (T2S), Europe’s settlement platform.

“Some trading platforms execute trades until 19:30 CET with T2S starting settlement for T+1 at 20:00 CET. This leaves little time for market participants to get their settlement instructions to the CSD ahead of the T+1 settlement date starting,” says Arnoud Siegmann, COO of Cboe Clear Europe.

But tinkering with the post-trade ecosystem can only achieve so much. Ultimately, a tight turnaround will depend on the input and energy of market participants. In this respect, it is not so much the US example as the UK example that might help Europe to negotiate its transition.

The UK has set up an accelerated settlement technical group, led by more than 450 volunteers from 110 industry firms, with the regulator as an observer.

Andrew Douglas, the chair of the UK technical group, said that this model had allowed the technical group to be far more productive than otherwise possible. He estimates that they have already completed around two years’ worth of work in just six months.

This model could provide a blueprint for Europe’s path to transition, particularly given that many of the participants of the UK technical group area also heavily involved with EU talks about accelerated settlement cycles.

Calling on the European Commission or Esma to set a date, Douglas contrasted the UK’s more collaborative approach with that of the EU, where it is not clear who exactly is coordinating the effort.

“We find ourselves in a situation where the industry is going to be making recommendations to the regulator in community: ‘These are the changes we would like to see, and this is how we believe you can support the industry in achieving those,’” Douglas said. “Which seems to me to be the inverse of what is happening here in Europe, where the industry is perhaps more waiting for the regulators to give them the framework within which they operate.”