Months after the North American T+1 transition and years after demands for a shortened settlement cycle began, ESMA has recommended that the EU make its move on 11 October 2027.
Since 2014 and the implementation of CSDR, trades of European transferable securities have been required to settle no more than two business days after trading takes place (T+2). In the years since, a number of non-EU jurisdictions and asset classes have moved to a T+1, or even T+0, settlement cycles. Discussions around when the EU will make its move have focused on the complexity of shortening settlement cycles across the Union’s 27 member states.
While it recognises that the transition will come with costs, ESMA believes that the benefits to EU markets – including risk reduction, margin savings and reduced costs from global alignment – outweigh these challenges. Europe will be more closely aligned with major jurisdictions, including North America, China and India. “While ESMA understands that the misalignment is not entirely new, the current misalignment with the US in particular is creating additional costs and frictions for funds, issuers and CSDs,” the authority noted.
All instruments should migrate simultaneously, ESMA advised, suggesting that 11 October is adopted as the transition day. This avoids the difficulties of launching a large initiative in the final months of the year, and leaves a gap after the end of the third quarter.
In advance of the transition, harmonisation, standardisation and modernisation efforts are required across the financial sector to improve settlement efficiency and ensure that post-trading processes are capable of operating on a T+1 basis. If preparations are not sufficient, ESMA warned, markets risk immediate and long-term settlement efficiency deterioration. The cost and complexity of such initiatives may be more difficult for smaller market participants, ESMA acknowledged, but added that making the changes “would be a catalyst to higher settlement efficiency in the EU”.
ESMA also highlights the value this will bring to the savings and investments union, a priority for European authorities alongside the long-awaited capital markets union (CMU).
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From a regulatory angle, the Central Securities Depositories Regulation (CSDR) and the settlement discipline framework must be amended to provide legal certainty around T+1, the authority added. Additional governance will also need to be introduced to support the change, constructed with the input of the European Commission, ESMA and the ECB.
Looking forward, “A shorter settlement cycle (ie T+0) does not seem possible at this point in time although, after T+1 has been achieved in the EU and pending a deeper assessment, further consideration could be given to it,” ESMA said.
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