The Association for Financial Markets in Europe (AFME) today responded to ESMA’s call for evidence on shortening the settlement cycle in the European Union, warning that “a rushed or uncoordinated approach” will likely result in increased risks, costs and inefficiencies for European capital markets.
“Moving to a T+1 settlement cycle will be a complex and demanding undertaking for the entire industry, so it is important that feedback is carefully considered before next steps are decided,” stressed AFME’s director of post-trade, Pete Tomlinson.
“Any move to a T+1 settlement cycle must be effected in a way that does not introduce new risks, damage the existing efficiency, liquidity and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers. If a decision to move to T+1 is made, it will be necessary to define an appropriate timetable that generates industry momentum and provides clarity to market participants.”
AFME supports ESMA’s conclusion that any decision to shorten the settlement cycle in the EU should be based on a proper cost-benefit analysis. The association noted that: “It is critical that this considers not only the impact on post-trade processes, but also potential broader market impacts on trading and liquidity and the competitiveness of EU markets.”
In particular, AFME stressed to ESMA that any cost-benefit analysis should also give due consideration to potential impacts on broader market functioning – in particular FX and securities lending markets – and any knock-on impact on this might have on trading and liquidity.
The association also warned that: “A rushed or uncoordinated approach will likely result in increased risks, costs and inefficiencies in European capital markets.”
AFME is calling for a coordinated approach across Europe, including EEA countries, Switzerland and the UK, noting that while North America’s upcoming migration to T+1 in May 2024 represents an opportunity to incorporate “lessons learned” before making a decision in Europe, the complexity of the European post-trade ecosystem could make T+1 adoption a more challenging project in Europe as compared to other jurisdictions.
AFME leads the European Task Force in preparation for the move to T+1 settlement cycles in North America in May. The Task Force also today released high-level comments in response to ESMA, in which it warned that any move to T+1 in Europe would be a “complex and demanding undertaking for the entire industry”.
“Firstly, moving to T+1 in EU markets is more challenging than the previous move to harmonise T+2 in 2014. The compression of the time available to complete post-trade and ancillary processes is more severe than previous reductions in the settlement cycle,” said the statement. “Secondly, moving to T+1 in EU markets is more challenging than a similar move in other jurisdictions, such as the US. The nature and complexity of the European ecosystem creates additional complexities and specificities which must be considered.”
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