T+1 in Europe: What You Need to Know
- The European Securities and Markets Authority (ESMA) has proposed a shift to T+1 settlement by October 2027.
- Key challenges include market fragmentation, the need for greater automation, and a potential rise in settlement failures.
- In January 2024,the UK Chancellor of the Exchequer assigned a technical group to oversee the transition to T+1.
- The UK’s final report is anticipated in january 2025, which will also confirm the transition date.
T+1 in the European Union
On November 18, 2024, ESMA unveiled its highly anticipated report on shortening the settlement cycle within the European Union. This followed a joint statement on October 15, 2024, by ESMA, the European Commission, and the European Central Bank, which laid the groundwork for a governance structure to facilitate the transition to T+1. This governance framework aims to include representation from across the EU financial sector, ensuring a balanced and inclusive approach.
Next,the European Commission is expected to introduce a legislative proposal to shorten the settlement cycle,with EU co-legislators to determine the appropriate timing for implementation.
Breaking Down ESMA’s T+1 Report
ESMA’s report, commissioned through the CSDR Refit initiative, evaluated four critical areas:
- The feasibility and impact of shortening the settlement cycle on market infrastructures and participants.
- A cost-benefit analysis of transitioning to T+1.
- Strategies for implementing the T+1 model.
- Global developments in settlement cycles and their influence on EU capital markets.
While the analysis faced challenges in capturing every detail,ESMA concluded that reducing the settlement cycle to one business day post-trade (from the current T+2 to T+1) is essential. A move to T+0 remains a distant possibility. ESMA emphasized that adopting T+1 is crucial for maintaining the EU’s competitiveness in global markets. Despite an incomplete cost-benefit analysis, the authority believes that delaying this transition could make EU capital markets less appealing to investors.
The Road to T+1 Settlement in the EU: Challenges and Opportunities
the European Securities and Markets Authority (ESMA) has set its sights on transitioning the European union to a T+1 settlement cycle by October 2027. This move aligns the EU with other major financial markets, such as the United States, which have already adopted or are moving toward shorter settlement cycles.While the shift promises greater efficiency and global harmonization, it also brings a host of challenges unique to the EU’s financial ecosystem.
Key Challenges in Adopting T+1
Transitioning to a T+1 settlement cycle is no small feat. ESMA has identified several hurdles that must be addressed to ensure a smooth transition:
- Automation and Investment: The need to automate processes across the custody chain—from trading to settlement—requires significant technological upgrades and financial investment.
- Fragmented Landscape: The EU’s settlement infrastructure is highly fragmented, with varying practices and systems across member states. This lack of uniformity complicates the transition.
- Risk of Settlement Fails: A shorter settlement window could lead to an increase in failed transactions, particularly in the early stages of implementation.
ESMA emphasizes that striking the right balance between regulatory requirements and industry-led initiatives is crucial. Market participants will need to take proactive steps, including:
- Upgrading systems to handle faster processing times
- Establishing standardized market practices
- reviewing and adapting the functionalities of market infrastructures
Beyond these operational adjustments, ESMA sees the T+1 transition as an prospect to drive further harmonization and standardization across the EU. This aligns with the broader objectives of the Savings and Investments Union (SIU), aiming to create a more integrated and efficient financial market.
Timeline for Implementation
ESMA has outlined a three-phase roadmap to achieve the T+1 settlement cycle by the proposed deadline of 11 October 2027:
- Planning Phase: By Q3 2025, the industry must finalize technical solutions and prepare for implementation.
- Growth Phase: Industry-wide implementation efforts will take place, with completion targeted for Q4 2026.
- Testing Phase: Extensive testing will occur throughout 2027 to ensure readiness for the transition.
In the coming months, the European Commission (EC) will present a legislative proposal to formalize the transition. Meanwhile, ESMA will focus on fostering collaboration between regulators and market participants to address technical challenges and ensure a seamless shift to T+1.
T+1 in the UK: A Parallel Journey
While the EU charts its course toward T+1, the United Kingdom is also exploring the feasibility of adopting a shorter settlement cycle. The UK’s financial markets, closely tied to global systems, face similar challenges and opportunities.However, the post-Brexit landscape adds an extra layer of complexity, as the UK must navigate its transition independently while maintaining alignment with international standards.
As both the EU and the UK move toward T+1, the global financial community will be watching closely. The success of these transitions will depend on collaboration, innovation, and a shared commitment to creating more efficient and resilient markets.
How will the EU’s fragmented settlement infrastructure impact the transition to T+1?
Interview with Dr. Elena Müller, Financial Markets Expert and Advisor to ESMA on T+1 Transition
Archyde News: Dr. Müller, thank you for joining us today. The European Securities and Markets Authority (ESMA) has proposed transitioning the EU to a T+1 settlement cycle by October 2027. Can you explain why this shift is so crucial for the EU?
Dr. Elena Müller: Thank you for having me. The shift to T+1 is essential for several reasons. First, it aligns the EU with other major financial markets like the United States, which are already moving toward shorter settlement cycles.This alignment is critical for maintaining the EU’s competitiveness in global markets. Second, shorter settlement cycles reduce counterparty risk and improve market efficiency. In a world where speed and reliability are paramount, T+1 ensures that EU capital markets remain attractive to international investors.
Archyde News: ESMA has highlighted several challenges in adopting T+1,including the need for greater automation and the EU’s fragmented settlement infrastructure. How significant are these challenges,and how can they be addressed?
Dr. Elena Müller: These challenges are indeed significant but not insurmountable. The EU’s settlement infrastructure is highly fragmented, with different practices and systems across member states. This fragmentation complicates the transition, as it requires harmonizing processes and technologies across borders. Automation is key here. To achieve T+1, we need to automate processes across the entire custody chain—from trading to settlement. This will require significant technological upgrades and financial investment from market participants.
To address these challenges, ESMA is working on a governance framework that includes representation from across the EU financial sector. This collaborative approach ensures that all stakeholders have a voice in the transition process. Additionally, the European Commission is expected to introduce a legislative proposal to support the shift, providing a clear roadmap for implementation.
Archyde News: the UK has also been proactive in this area, with the chancellor of the Exchequer assigning a technical group to oversee the transition to T+1. How does the UK’s approach compare to the EU’s,and what can the EU learn from it?
Dr. Elena Müller: The UK’s approach is quite similar in terms of objectives, but it benefits from a more centralized financial infrastructure, which simplifies the transition. The UK’s technical group is expected to deliver its final report in January 2025, which will confirm the transition date and outline the necessary steps. The EU can learn from the UK’s focus on technical readiness and stakeholder engagement.However, the EU’s challenge is more complex due to its multi-jurisdictional nature. That said, the UK’s progress can serve as a valuable case study for the EU, especially in terms of managing timelines and ensuring buy-in from all parties.
Archyde News: ESMA’s report on T+1 highlighted the importance of global developments in settlement cycles. How do these global trends influence the EU’s decision-making process?
Dr. Elena Müller: Global trends play a significant role. The move toward shorter settlement cycles is a global phenomenon, driven by the need for greater efficiency and reduced risk. The United States, such as, is already moving toward T+1, and other major markets are likely to follow suit.If the EU delays its transition, it risks falling behind and becoming less attractive to global investors.ESMA’s report emphasizes that adopting T+1 is not just about keeping pace with global trends but also about maintaining the EU’s position as a leading financial hub.
Archyde news: what are the potential risks of transitioning to T+1, and how can they be mitigated?
Dr. Elena Müller: one of the primary risks is an increase in settlement failures, particularly during the initial phase of the transition. This could occur if market participants are not fully prepared or if there are gaps in the automation of processes. To mitigate this risk, it’s crucial to have a robust testing and implementation plan, with clear timelines and milestones. Additionally, ongoing communication and collaboration among all stakeholders—regulators, market participants, and infrastructure providers—will be essential to address any issues that arise.
Another risk is the financial burden on smaller market participants, who may struggle to invest in the necessary technological upgrades. To address this, regulators could consider providing support or incentives to ensure that all players can meet the new requirements without being disproportionately affected.
Archyde News: Thank you, Dr. Müller, for your insights. It’s clear that the transition to T+1 is a complex but necessary step for the EU.We look forward to seeing how this unfolds over the coming years.
Dr. Elena Müller: Thank you.It’s an exciting time for EU capital markets, and I’m confident that with the right approach, the transition to T+1 will be a success.
