Should EU catch-up with the US on T+1 shift in trading? An interesting question to consider…

The question of T+1 is a legitimate one for treasurers and CFOs to address. The EU cannot simply observe what others are doing, at the risk of losing its way, at a time when it wants to repatriate clearing and settlement operations to the continent. To lag behind would be to risk being definitively sidelined from the financial game, leaving the leadership to London or others. The stakes are colossal for the EU. Another challenge, as if we didn't already have enough... What should Europe be doing about it? ?

T+ what?

In last May, US and Canada moved from settling securities transactions 2 days after a trade to one. This shift to “T+1” was a resounding success. The EU should likely follow sooner or later. T+1 means greater efficiency, increased liquidity and enhanced risk mitigation. These benefits cannot be contested. The policy makers aim at strengthening capital markets, adopting T+1. Now it has become critical and vital for all other financial centers. As the UK announced its intention to also move on T+1 by end of 2027, EU should also contemplate the idea. It is vital in Europe to have a firm commitment date for switching to T+1 to modernize our markets, to improve capital markets competitivity and to deliver value to investors. That’s the objective, especially considering the CMU project. We need to catch up and not to be further distanced from other big markets. As everything in Europe, it would take time to be aligned. Given the intricacies of our complex legislation and long processes, EU announced they will make all necessary legal and regulatory changes to enable adoption of T+1 by the close of 2027… to align us with UK. It is interesting to notice that under the new regime in the US, 95% of the transactions are affirmed on the trade date itself, a market improvement. The settlement fail rate of 2% remains constant and consistent with T+2. It means that it is feasible and that one day we will move to T+0. But the good news, based on US experience, is that the total margin posted in the clearing fund fell by 23%. Therefore, it may freeze a huge amount of cash for brokers/dealers to use elsewhere. As we were never doubting, the shorter settlement cycle creates a more efficient and resilient market. Don’t you think European investors deserve the same advantages?

Reinforcing EU capital markets

As the new Commission has as a target to reinforce capital markets, it could be a first step. It may strengthen the EU markets and reduce the counterparty risk. The 2 days of gap between trade execution and settlement creates the risk of counterparties’ default before the trade is finalized. It is reinforced in periods of high volatility. We do believe T+1 reduces exposure, offers better protection for investors and creates a more stable market environment, we all hope. Shorter cycle could also lower costs and improve capital efficiency, reducing the need for collateral.

Why not benefiting from such a positive change?

Why not unlock billions of EUR otherwise tied up in margin? We need to free up capital to be reinvested in new opportunities and business activities. Lower trading costs and more efficient use of capital would be welcomed by investors. It is obvious that the faster trades are settled, the faster investors can reinvest money. Eventually increase liquidity in Europe and enhance price discovery, lowering the transaction costs. This could generate a more dynamic market in Europe. The cross-border harmonization and standardization is an important element, for being simply aligned. Again, EU could follow behind. The mismatch is also a concern. Imagine a EU-listed ETF trade in T+2, but potentially exposed to US equities or securities themselves traded in T+1. The mismatch could generate unneeded complications. T+1 is a “must” to remain competitive and stay an attractive destination for investors. We all know that competitivity has been pointed by Draghi’s report and is a key objective for the new Commission. T+1 should keep us on a level playing field globally and enable innovation in trading venues. We should synchronize Swiss, UK and EU markets and stay aligned. Of course, such a significant move would require investment in technology, modernization of back-offices and market infrastructures. The American example showed us the return on investment. The EU policy makers should influence the decision and validate soon the move towards T+1. Lots of stakeholders have already made recommendations to ESMA. The timing is critical to be ready on time given the number of players in Europe. The EU commission should back-up without equivoque that they back this initiative to simply remain in the race. With the focus on CMU, anything to maintain our competitivity is necessary to be contemplated and implemented.

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Fran?ois Masquelier, Chair of EACT – Luxembourg – November 2024

Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

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