The European Securities and Markets Authority’s (ESMA) Securities and Markets Stakeholder Group (SMSG) has warned that the move to T+1 could result in increased settlement fails, particularly in bonds and ETFs.
The SMSG said the temporary increase in settlement fails could occur thanks to the complexity of the EU post-trading landscape and the specific features of certain asset classes. Europe is expected to move to a T+1 settlement cycle by Q4 2027, or early 2028.
For ETFs in particular, trading at premiums to their fair value, volumes being determined by the day of the week, different prices for T+1 vs T+2 settling in the same ETF, and potential underperformance in UCITS (not just ETFs) due to the funding gap caused by misaligned settlement, will all be exacerbated as more countries move to T+1.
“Without additional measures to improve settlement efficiency, moving to T+1 could make the process more difficult to operate. The SMSG calls on ESMA to ensure that these operational challenges do not harm investors and market integrity,” the SMSG said in its advice to ESMA.
The group suggests the regulator should consult on the issue and that investors should be shielded from any negative impacts arising during the transition, such as increased costs, widened spreads, or liquidity shortages.
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