The European Securities and Markets Authority (Esma) has proposed a move to a T+1 settlement cycle for EU capital markets, with the transition targeted for the fourth quarter of 2027. In a report on Monday 18 November 2024, the market regulator provided a comprehensive assessment of shortening the settlement cycle, which could significantly enhance post-trade efficiency and market integration.
The proposed shift to T+1, meaning that securities transactions would be settled one day after the trade, compared with the current two days, is expected to promote the overall resilience and efficiency of the European Union’s financial infrastructure. According to Esma, this change aligns with the EU’s broader objectives of fostering market integration and supporting the Savings and Investment Union. The regulator believes the move would reduce settlement risks, improve liquidity and streamline operations for investors and financial institutions alike.
T+1 refers to the settlement, or completion, of trading in financial instruments being completed on the transaction date plus one day at most.
Timeline
Esma has advised that the transition to T+1 should occur simultaneously across all relevant financial instruments, with the optimal date for implementation set for 11 October 2027. This recommendation takes into account the challenges posed by launching such a significant project during the months of November and December, as well as the logistical difficulties associated with the first Monday of October, just after the end of the financial quarter.
The authority also emphasised the importance of a coordinated approach with other jurisdictions across Europe to ensure a smooth and efficient transition. A joint effort with the United Kingdom and Switzerland was particularly noted as essential to achieving harmonisation across key markets.
Benefits
Esma’s report assessed the potential costs and benefits of transitioning to T+1. While the move would entail some challenges, particularly in terms of regulatory amendments, the overall benefits were deemed substantial. These benefits include significant risk reductions, margin savings and the elimination of discrepancies with other major global markets that have already adopted or are planning to adopt shorter settlement cycles, such as the US.
However, the transition to T+1 would require important changes to existing regulatory frameworks. In particular, the Central Securities Depositories Regulation (CSDR) and the settlement discipline framework would need to be amended to provide legal clarity and ensure the proper functioning of post-trading processes. This, according to Esma, is crucial for the success of the transition.
Furthermore, the report highlighted that the implementation of T+1 would require substantial investment in harmonisation, standardisation and modernisation efforts by all market participants. These measures are intended to enhance settlement efficiency and address the complexities of the EU’s capital markets.
Governance
Given the complexity of the EU’s trading and post-trading environment, Esma has stressed the need for specific governance structures to oversee the transition. In collaboration with the European Commission and the European Central Bank, Esma will continue its regulatory work on revising rules related to settlement efficiency and governance, as well as addressing any challenges related to the T+1 implementation process.
Industry reactions
The proposal has garnered support from major players in the financial infrastructure sector. Sam Riley, CEO of Clearstream Securities Services, expressed strong backing for Esma’s proposal. He told Paperjam on Monday, “We welcome the coordinated approach between the EU, the United Kingdom and Switzerland, as well as the call to amend article 5 of CSDR to provide legal clarity for all member states. This initiative will significantly enhance the strongly needed harmonisation in European capital markets, especially in the post-trade sector.”
A spokesperson from Euroclear, a leading financial market infrastructure, also welcomed the proposal, noting, “As a Financial Market Infrastructure, we support global settlement efficiencies.” However, acknowledging that the challenges for European markets are greater than those in the US, they added, “Euroclear is preparing for this move and has consistently advocated for a measured, nuanced approach that takes into consideration the perspectives of central securities depositories to ensure the shift benefits the entire financial ecosystem. Transitioning to T+1 poses greater challenges for a multi-market Europe than it did for North America and requires a collective, coordinated effort, underpinned by global alignment. We welcome Esma’s determination to set a date in autumn 2027 and are optimistic about achieving alignment between jurisdictions across Europe. The key timelines and progress in determining an effective governance structure in the EU will help realise the benefits of reducing the settlement cycle, such as lowering counterparty and operational risk.”