EU T+1 Industry Feedback

Written by Xinyi Cui and Ananya Chauhan

On 5th October 2023, ESMA launched a “Call for evidence on shortening the settlement cycle” (“the Call”) with the objective to collect stakeholders’ views as well as quantitative evidence to form a better understanding of the possibility for the EU to shorten the settlement cycle. Taking into consideration of the feedback received from the Call, ESMA published the feedback statement in March 2024, including the main industry considerations from the respondents, ESMA’s preliminary views and next steps.

Suggested Timeline and Milestones

The industry feedback indicates that an eventual transition to T+1 settlement should occur in the mid-term, spanning one to seven years. However, certain prerequisites must be met, including robust cost-benefit analysis, insights from other jurisdictions, and coordinated efforts among the EU, UK, and Switzerland. ESMA’s preliminary assessment suggested that an eventual transition to T+1 may occur no earlier than 32 months from the industry notification and ESMA agrees that it should avoid coinciding with peak corporate actions activity. However, the suggested timeline may not be ESMA’s final position.

Drawing inspiration from successful practices in the US. T+1 transition, respondents suggested the main milestones. First, an industry-wide agreed go-live date needs to be established. Next, industry will go into a preparatory phase where discussions should be conducted to identify necessary technical and organizational adjustments. And CSDR Article 5(2) should be amended to set force the regulatory changes regarding to shortened settlement cycle. The process then moves through implementation, end-to-end testing, and finally, post-go-live fine-tuning.

Key challenges

Alignment with US and UK: One of the primary challenges the industry feedback indicates in transitioning to a T+1 settlement cycle is finding the right balance in timing with both the US and UK markets. Addressing this timing issue is essential to maintain a cohesive and efficient market environment, ensuring that the EU can operate smoothly within the broader global context.

Operational Processes: Ensuring timely matching, allocation, and confirmation of trades on the Trade Date is paramount to maintaining market integrity and reducing settlement risks, according to industry feedback. Additionally, there must be clear documentation for client onboarding, static data management, and electronic Standard Settlement Instructions (SSI) sharing to support seamless operations. Furthermore, ETFs, mutual funds, and other open-ended funds operating across multiple markets face specific challenges that must be addressed to ensure compliance and operational efficiency.

Technology and Infrastructure: The transition to a T+1 settlement cycle necessitates significant enhancements in technology and infrastructure. Increasing automation and straight-through processing rates is crucial for managing the higher volume and complexity of transactions expected in a T+1 environment. It is key to ensure that market infrastructure is resilient and efficient to support these changes. Investments in technology will help mitigate risks, streamline operations, and facilitate the seamless execution of trades, making the entire process more robust and reliable.

Inventory Management and Timeliness: Managing inventory within a compressed timeframe presents its own set of challenges. Efficiently handling securities lending and collateral management is critical to maintaining market stability. Additionally, managing corporate actions and distribution dates requires careful planning and execution.

While industry participants widely acknowledge the challenges, ESMA received limited quantitative evidence supporting the notion that a shortened settlement cycle is too difficult to implement. Addressing these challenges through a collaborative and proactive approach will enable the industry to successfully transition to a T+1 settlement cycle. This will lead to greater efficiency, reduced risk, and enhanced market resilience.

Next Steps

The CSDR Refit regulation now requires ESMA to evaluate the shorter cycle's feasibility, costs, and benefits, and devise a transition plan by January 17, 2025, considering various financial instruments and international market effects.

ESMA also intends to gather additional feedback from stakeholders in the APAC region, small and medium market participants, and retail investors.

In Conclusion

ESMA is in the process of assessing the implications of shortening the settlement cycle to T+1. The views expressed by respondents are mixed, with highlighted operational impacts and costs, as well as potential benefits from shorter settlement cycles. Several questions remain, including the impact on various market activities and the implications for retail investors and smaller market players. Feedback suggests that alignment and cooperation within Europe would be beneficial, and ESMA is encouraged to consult with APAC investors who would be impacted by a potential EU move to T+1. ESMA will take into consideration of lessons learned from North American moving to T+1 and feedback from APAC and will aim at publishing the report mandated by CSDR refit in Q3/Q4 2024, before the 17 January 2025.