A move by Europe to a one-day settlement cycle (T+1) could bring significant benefits but there would also be challenges and barriers, according to a new paper – T+1 Settlement in Europe: Potential Benefits and Challenges from Association for Financial Markets in Europe (Afme).
In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days but with the US recently deciding to move to T+1, Afme considers the pros and cons of a switch.
On the plus side, A shorter settlement cycle would reduce counterparty, market and credit risk especially during periods of high volatility, as well as a significant reduction in costs. It would not only limit firms’ open exposures over the settlement period, but there will also be lower margin requirements, allowing market participants to better manage capital and liquidity risk.
In addition, the main would help maintain global alignment given that some major jurisdictions will be adopting T+1 and the end users of capital markets may benefit from Europe following the same approach.
On the negative front. the paper notes a switch to T+1 would slash the time available for post-trade operations from 12 hours to two.
It also could lead to an increase in both settlement fails and operational complexities for global participants in different time zones.
The impact for securities based derivatives could be more pronounced and the paper recommends further assessment required to identify impacts to the swap lifecycle, such as margining calculation and collection.
“The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1, says Pete Tomlinson, director, post trade, Afme.
He adds, “A rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.
“For this reason, Afme is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption.”
Phil Flood, regulatory expert at Gresham Technologies, notes, “AFME shines a much-needed light on the seismic tech compression change the move to T+1 represents. Numerous financial institutions are already going through the process of reassessing their current post-trade operations. When making the transition to T+1, there must be a greater focus on data quality and integrity.”
