A lack of alignment with the US’s T+1 settlement cycle is already causing problems in Europe, according to the latest report from the European T+1 Industry Task Force. With the UK planning to make its move, the EU needs to align with its neighbours – or risk further fragmentation.
Those consulted on the report were divided as to whether H2 2027 is a realistic expectation for T+1 to come into play. Although this would align with the UK’s expected transition date, the complexity of European market structure may mean more time is needed.
However, not aligning with the EU and Switzerland would cause complexities around pricing and liquidity for securities active across jurisdictions. “Fragmentation increases cross-border settlement risk and can constrain interoperability. Separate market standards would require separate operating processes, which would challenge international firms,” the report affirmed.
While supportive of the move overall, the task force states that the timeline for its implementation must reflect the complexity of the project. It advises that once a firm decision has been made on the regulatory, technical and operational changes that are required, between 24 and 36 months should be allocated to the transition. This will inform the implementation date.
Coordination is key here, the report stressed, with the involvement of all stakeholders involved in the trading and settlement of EU securities. The task force suggested that EU public authorities establish a broad industry stakeholder group acting in coordination with the UK, Switzerland and other key regional partners. The UK T+1 Technical Group released its interim recommendations in September, and is currently running a consultation until the end of October. The report is scheduled to be finalised in December.
Andrew Douglas, chair of the UK T+1 Task Force Technical Group, told Global Trading that the UK will continue to work with the EU as it makes its way to the shortened settlement cycle. “We have done this since the early days of the task force. We have observers from EFAMA, EACH and ESCDA attending our weekly UK steerco meetings, I have regular catch up calls with ESMA and the Commission and many of the members of the EU task force sit on the UK task force,” he explained. “The same basic principles we operate under in the UK will have resonance for the EU – the market and the regulators need to be aligned on the end goal, the automation.”
On the European Task Force’s report, Douglas said that “there is a degree of commonality between the reports. This is not a surprise, given many of the EU task force members are also on the UK task force. Commonality is a good thing.”
Existing post-trade processes must be improved and barriers removed, the European report affirmed. It noted that many are concerned about the potential increase in settlement fails that T+1 could prompt, concluding that implementation must come alongside broader practice changes.
These include updating CSDR Article 5 regarding the intended settlement date, clear definitions of the scope of the requirements, and changes to FMI rulebooks and industry standards. A potential temporary suspension of CSDR cash penalties as the new cycle is implemented should also be considered, the task force added.
The report also analysed the impact of a T+1 transition on related processes, including securities lending markets, prime brokerage, FX markets and corporate action processing.
The report has been shared with ESMA in advance of the association’s own T+1 report and recommendations, expected to be released in January. This report will be the basis for a political decision on T+1.
“Experience in other jurisdictions has shown that close cooperation between regulators and the financial industry is of the utmost importance to facilitate the transition to T+1,” ESMA said in its statement on the report. “ESMA, in close coordination with national competent authorities, DG FISMA and the ECB’s DG MIP, have therefore agreed to establish a governance structure, incorporating the EU financial industry, as soon as possible to oversee and support the technical preparations of any future move to T+1.”
“It will be important that this governance is inclusive and ensures balanced sectorial and geographical representation,” ESMA said of its upcoming publication.
©Markets Media Europe 2024
