UK T+1 Settlement Report Reaction

On March 28th, 2024, the UK’s Accelerated Settlement Taskforce published its report and recommendations on shortening the settlement cycle in the UK from T+2 to T+1. The report, published by HMRC, recommended a target date no later than 31st December 2027, emphasized with key industry considerations and next steps, including the formation of a technical working group.

It is agreed that the move must happen for several reasons. Harmonization with global markets, improving market resilience, increased efficiency, opportunity to invest in automation and a reduction of both market and credit risk are all deemed to be critical aspects of the move. The question is no longer ‘if’ the UK should shorten the settlement cycle, it is now ‘when’ and ‘how’.

Timing

The report recommends that the UK implement T+1 no later than the end of 2027, likely to synchronize with ESMA’s final decision on Europe moving to T+1. Furthermore, 2025 is identified as the year for mandating key operational processes, including the matching, allocation and confirmation of trades on Trade Date. Market participants will need time to plan changes to their Operating Models and to forecast their capital expenditure before the end of 2024. The report recommends that the go-live date for the UK to move to T+1 should be agreed by the Technical Working Group later in 2024.

The situation is complicated by aligning with the rest of Europe. An ESMA established industry taskforce is expected to produce a report of their own later in the year with recommendations and dates on Europe moving to a T+1 cycle. There should be a consensus on whether the UK wait on the rest of Europe or start the move in advance. By setting a target of 2027, it appears that alignment with the rest of Europe is being considered.

The report expects a two-year plan considered to be sufficient: one year for planning and one year for the investment and implementation of change. As the SEC gave participants 15 months from final decision to go-live date, the report considers this a fair outcome.

Key Challenges

It is important that any misalignment with both the US and Europe’s settlement cycles are kept to a minimum. It raises the question of which solution is more favourable. Concern about waiting too long after the US, but also going too quickly before Europe are features of the report. Fragmentation across global markets is seen as something to be addressed imminently. CREST depositary interests (CDIs), representing overseas domestic equity in the UK, need careful attention due to potential conflicts between CDI and underlying asset settlement cycles. Additionally, XS ISINs can be traded and settled as both T+1 and T+2, leading to dual liquidity profiles. This resembles the DTC versus Euroclear settlement of corporate bonds, which participants must consider for inventory management in US T+1.

Similar challenges that faced the US will face the UK, and are a theme of the report:

• Matching, allocation and confirmation of trades must be done on Trade Date to ensure opportunity is available to address exceptions. It is recommended that mandating these, and the release of settlement instructions, should happen in 2025 before T+1 go-live.
• Market standards and best practices for client onboarding, static data and electronic SSI sharing must be documented.
• Operational deadline concerns for FX, funding and CREST, especially for those investing from outside of the UK, will be reviewed.
• ETFs, Mutual Funds and other Open-Ended Funds with underlying securities across markets will have their own challenges.
• Technology investment to increase automation and STP rates across operational processes is a key theme. Infrastructure needs to be more robust and efficient across the market.
• Inventory management will be a challenge in a compressed timeframe. Timeliness of securities lending recalls, repos and collateral management will be crucial.
• Corporate Actions, specifically distribution dates, can learn from the US.

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Next Steps

The report recommends the formation of a Technical Group to coordinate with the market and establish common processes and set market best practices best practices. This group will be responsible for proposing a workable 2027 go-live date before the end of 2024, and for outlining a plan to mandate key post-trade processes in 2025. The group should look at lessons learned from the US, identifying opportunities to implement similar market standards and initiate deep-dive reviews into some of the challenges that were not met successfully. The group should also consider if mandated processes and common operational standards will be scalable for the potential of T+0 or instantaneous (‘atomic’) settlement at a future date.

Conclusion

The report outlines logical next steps, and the establishment of a Technical Group is welcomed. Although the key challenges do not differ significantly from those experienced by the US, lessons must be learned, and the industry should welcome the proposal of at least two years of planning and implementation time for a 2027 go-live date. Mandating processes in advance of any T+1 go-live will be challenging, yet essential, and participants should take the opportunity to obtain investment in operational technology for the betterment of the wider market.

Written by Greg Copeland