Financial Industry Transitions to T+1 Settlement Cycle. Is Europe ready?

Challenges and Considerations 

The implementation of the Central Securities Depositories Regulation (CSDR) has pushed EU market operators to invest in systems and processes, ensuring compliance with the requirements of the settlement framework, including reporting of settlement failures and systems for managing of financial penalties. Changing the maximum settlement date foreseen in the CSDR to reduce the duration of the securities settlement cycle would imply costs for market participants, resulting from the transition from manual processes and greater automation. Among other expenses, these costs could be passed on to customers, including retail customers, potentially impacting compliance with other EU regulations. In addition, the obstacles preventing a reduction to T+1 in the settlement cycle would persist in the case of a reduction to T+0, in particular by relying on automation and digitalization in the investment value chain.

Regarding financial penalties, ESMA has identified the risk of an increase in settlement failures with the adoption of a shorter settlement cycle, which would lead to additional financial penalty payments that market participants may face.

EU and UK Transition to Shorten Settlement Cycle

The adoption of a Shortened Settlement Cycle (T+1) in financial markets is a significant step towards enhancing efficiency and reducing risks. However, as the United States prepares to make this transition, the European Union (EU) and the United Kingdom (UK) appear to be proceeding with caution.

A move to T+1 is accompanied by the potential for increased settlement fails, leading to increased penalties for market participants. Moreover, a successful transition to T+1 requires widespread collaboration among EU and UK financial markets.

In this regard, in October 2024, the European T+1 industry task force published its recommendation on a high-level roadmap for the adoption of T+1 in the EU market, confirming that H2 2027—the date identified for the UK migration—could also be a feasible implementation date for the EU.

This entails coordinated efforts from various stakeholders, including market participants, regulators, and infrastructure providers. Achieving this level of collaboration demands careful planning, communication, and synchronization across the entire industry, making it a complex and time-consuming process. However, a proven track record of US and Canadian market migration could push the EU and UK to embrace such changes.

Hence, the EU and UK financial markets are currently navigating these challenges, weighing the benefits against the risks, starting discussions and proceeding with a measured approach towards a potential shift to T+1 settlement.