EU member states accepted the European Council’s proposal for the shortened settlement cycle on 7 May, with the amendment that securities financing transactions will be exempt. These transactions are non-standardised, and introducing an obligation to clear on a T+1 basis may be unfeasible, the Council agreed.
Franck Noel, managing director in the strategy, risk and transactions department at Deloitte, told Global Trading: “Whether this exemption will significantly change the workload remains uncertain. SFTs are often tied to bond ownership, meaning that if institutions use SFTs on their assets, they will still need to review their processes and value chain to ensure compliance with T+1 settlement requirements. Additionally, recall procedures will need to be accelerated to accommodate the shorter settlement cycle.”
The exemption is something that has been widely requested by market participants, he said. SFTs typically settle on a shorter timeline than their underlying trades, he said, and require greater flexibility in a T+1 landscape. Additionally, the fact that SFTs are not explicitly excluded from the Central Securities Depositories Regulation (CSDR) could lead to confusion.
In its statement, the council clarified: “The exemption only applied to SFTs documented as single transactions composed of two linked operations.”
Europe will move to a T+1 settlement cycle on 11 October 2027, following negotiations between the European Council and the European Parliament. The transition date was initially recommended by ESMA last November.
READ MORE: Europe to move to T+1 by October 2027
The UK announced an 11 October go-live for T+1 earlier this year.
READ MORE: UK confirms EU T+1 transition alignment
In its report to the UK Government, the Accelerated Settlement Technical Group recommended that SFTs be made exempt from T+1 requirements and called for greater legal and regulatory clarity around the instruments.
“There is a significant share of SFTs that are executed for a settlement date later than the standard settlement cycle, a trend that is expected to increase in both repo and securities lending markets. Restricting the ability of UK trading venues to offer participants the possibility to execute these transactions would risk driving this activity away from those venues.
“The current scope of UK CSDR in relation to SFTs is ambiguous and this has caused confusion and regulatory uncertainty in the context of the move to T+2. The transition to T+1 provides an opportunity to rectify the situation by providing clarity and legal certainty in relation to the treatment of SFTs, especially as SFT markets are becoming increasingly electronic.”
In recent years, numerous concerns have been raised about the feasibility of Europe moving to a T+1 environment.
“Compared to a year ago, we’ve seen a complete shift. Now, there is no room for hesitation,” Noel said.
“In my view, the main changes have been a clear political commitment to making this transition happen in Europe, regardless of challenges, and the agreement on a common implementation date with the UK and Switzerland, which was widely expected by the market.”
“I still believe the transition presents significant challenges for all stakeholders, such as operational processes adjustments (like accelerated affirmation and the need to revamp settlement processes with more automation), liquidity issues, cross-border trades, ETF and securities lending impacts and more. But now the deadline is set, so we need to move forward on a full analysis of these complexities involved by the fragmentation of the European market and the necessary adjustments to the multiple post-trade infrastructures across the region.”
On the announcement, Andrzej Domanski, Polish minister for finance, suggested that a move to T+1 will support the European Union’s broader goals.
“A shorter settlement cycle of one day will make our capital markets more efficient. This is a concrete step to give heed to the calls to boost the EU’s competitiveness,” he said.
Improving European competitiveness is a priority of the union, particularly following the Draghi and Letta reports published in 2024. Other efforts made in this space include the simplification of listing in European markets and the introduction of the savings and investments union (SIU), designed to incentivise retail investment in the region.
While the move to T+1 will close the gap with the US market, Noel does not believe that a shortened settlement cycle will particularly help achieve this goal.
“Since T+1 is becoming a mandatory feature rather than a competitive advantage, it won’t necessarily provide an edge—but not adopting it would be a disadvantage,” he noted. “By realigning settlement cycles Europe will benefit from reduced counterparty risk exposure, enhancing market stability, and improved liquidity, as investors will access funds more quickly.”
“Only the regulatory deadline provides the necessary incentive to ensure timely execution. So, now that we have a common date In Europe, we must plan and assess in 2025, implement in 2026, and test in 2027 to ensure a smooth transition,” Noel concluded.
