The European Securities and Markets Authority (ESMA) has released its high-level roadmap for T+1 settlement, identifying 51 recommended actions as high priority and angling for securities financing transactions (SFTs) CSDR penalty exemptions.
The authority specifies that adherence to the standard operational timetable it outlines is “strongly encouraged” rather than legally required. However, it stresses that not harmonising with the standard could cause financial detriment to other market participants.
A proposal to amend Article 5(2) of CSDR, making SFTs executed on trading venues exempt from T+1 settlement obligations and temporarily suspending cash penalties, was published by the European Commission in February. A political agreement on this was reached on 18 June, after calls for clarification by market participants.
READ MORE: Clarity needed around Europe’s SFT T+1 exemption
Cash penalties are enforced under CSDR if a settlement fails, and are intended as a deterrent. The scope of the penalty is determined by the asset type, liquidity of the financial instrument, type of transaction and the duration of the fail.
Daniel Carpenter, CEO of Meritsoft, a Cognizant company, argues, “while the cash penalties can serve to incentivise firms to be ready for October 2027, it can also adversely affect a trader’s ability to source liquidity if counterparties believe the penalty of a trade fail is too costly. CSDR penalties are costing the industry around €70m a month [per Firebrand Research] and could well increase under T+1 timelines, especially as the EU moves to reinvigorate its capital markets through the Savings and Investment Union.”
Currently, CSDR penalty exemptions apply if the underlying cause of the fail is not attributable to the transaction participants or is attributed to operations that are not considered trading, for transactions where the failing participant is a central counterparty (unless the CCP does not interpose itself between the counterparties in a transaction) or when insolvency proceedings have been opened against the failing participant.
In the US, penalties for late settlements have not been imposed under T+1.
Francisco Béjar, head of CSD at SIX, commented, “CSDR penalties [have] the potential to add significant extra cost if moving to shorter settlements increases the volume of trade fails in the EU. We will be working closely with market participants to ensure they are ready and deliver high trade settlement rates so this step isn’t necessary. But it’s a sensible backup option if the market needs this.”
Carpenter added, “the possibility of suspending CSDR cash penalties during the transition to T+1 signals that EU officials are concerned about the likely increase in settlement fails as the markets adjust to the new settlement timeframe,” argues
ESMA has also called for changes to its guidelines on standardised procedures and messaging protocols under CSDR. Following its consultation paper on the amendments, the authority plans to submit draft amendments to CSDR in Q1 2026. Final guidelines are expected to be published in Q3 2026.
Elsewhere, acknowledging that divergence in settlement cycles across asset classes and geographies could cause liquidity management, performance and regulatory compliance issues for investment managers, the roadmap advises that there should be no penalties where moving to a T+2 cycle is not possible for investment funds.
The majority of investment funds currently settle on a T+3 or T+4 basis, ESMA states. While subscription and redemption should be reduced to T+2 where possible, the authority notes that this reduction may not be a practical change before the T+1 go-live.
Further minimising penalties for investment managers, ESMA states that regulatory clarification should be introduced to ensure that cash breaches caused by settlement misalignment are categorised as passive and non-reportable.
Giovanni Sabatini, independent chair of the EU T+1 Industry Committee, concluded, “we urge all market participants to review the recommendations, assess the impact on their systems and procedures and start planning how they want to prepare for the transition to T+1.”
