ESMA’s Call for Evidence (CfE) on the shortening of the settlement cycle, closed earlier today, 15 December, with the watchdog now considering a wide spectrum of outcomes following industry feedback.
The CfE was designed to assess the costs and benefits of a possible reduction of the settlement cycle in the European Union (EU). It also assessed whether any regulation would be required to help ease the impact of the shift to T+1 on other jurisdictions outside Europe, such as the US.
Following feedback received from the consultation period, ESMA has confirmed that it will consider all possibilities for a shortened settlement cycle, which includes both T+1 and a potential T+0. Respondents were invited to elaborate on both outcomes, allowing ESMA to assess both situations.
Given that the shift to T+1 will involve a lengthy implementation period, a potential shift to T+0 is being considered, to avoid future delays. ESMA did, however, highlight that the reduction of time available for post-trade processes would be even more acute if the EU was to move to T+0.
However, the potential for real time settlement has come under fire. In a letter to ESMA, the Association for Financial Markets in Europe (AFME) was against the immediate shift to T+0, stating: “We emphasise that we do not consider a default T+0 settlement cycle for securities transactions to be a realistic or desirable near-term policy objective.”
Elsewhere, AFME’s director of post-trade, Pete Tomlinson, noted that the move to a T+1 settlement cycle will be a complex and demanding undertaking for the entire industry, emphasising that it is important that feedback is carefully considered before next steps are decided.
“Any move to a T+1 settlement cycle must be effected in a way that does not introduce new risks, damage the existing efficiency, liquidity and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers,” he said. “If a decision to move to T+1 is made, it will be necessary to define an appropriate timetable that generates industry momentum and provides clarity to market participants.”
With the US making the switch to T+1 on 28 May next year, talk of a similar switch in the EU and the UK has been a key theme among EU and UK participants at conferences this year – with varying levels of hospitality.
Read more: FILS Europe 2023: ‘Unevenness’ of T+1 across markets will have challenges for institutions
“With the EU, in contrast to the UK and the US, you’re dealing with different currencies and multitudes of CSDs – that’s the main issue,” said Mathijs Genste, capital markets supervision and policy, AFM, speaking at the Fixed Income Leaders’ Summit (FILS) earlier this year.
“I would argue that from a technology perspective, CSDs and market participants would be perfectly able to do it but there’s very serious hiccups or barriers in the current way we have designed the infrastructure that are hampering a very straightforward, quick move to T+1 in Europe.”
A lack of harmonisation of settlement times globally has also been highlighted as an issue with the US’ shift to T+1. As it currently stands, there will be divergence in settlement times for the foreseeable future meaning that institutions will have to adapt to these challenges to avoid settlement fails.
“There are already enough issues in terms of settlement fails and long chains. The unevenness of the adoption of T+1 across the globe is as much of a challenge as just any one market going to T+1,” said Chris Murphy, chief executive and co-founder of Ediphy, also speaking at FILS.
ESMA noted that unlike other jurisdictions, the EU has a complex post-trade landscape with a high number of market infrastructures (CSDs, CCPs and trading venues), several currencies, matching model, and a common settlement platform which does not support all currency denominations of the instruments traded and settled in the EU and in which not all EU CSDs participate.
ESMA stated that will publish and submit to the European Commission (EC) a feedback report with its main findings in the course of 2024.