The Association for Financial Markets in Europe (AFME) has published a new paper discussing whether Europe should move to a one-day settlement cycle, weighing up the benefits and hurdles of a reduction.
With the US planning a move to T+1 over the next two years, the conversation has naturally shifted to Europe and whether it needs make a similar transition.
Europe moved from T+3 to T+2 in 2014, while the US made the same move in 2017.
However, the complexities around the European markets – a multitude of currencies, market infrastructures, and distinct legal frameworks – mean there is much more to consider when it comes to moving to T+1 than in the US.
Conversations over the past 12 months in Europe have seen few industry participants back a shift to T+1 in the immediate future, with multiple concerns voiced around operational readiness and an emphasis on focusing on existing problems around regulations – such as CSDR – and the T2S system.
AFME’s paper intends to provide some initial reflections on two major questions: should Europe move to T+1? And if so, how can this be achieved? Within its answers are a mix of benefits and barriers.
The benefits AFME highlighted included: a reduction of risk, a significant reduction of associated costs and the maintenance of global alignment.
Subsequently, the association said it supports a cautious approach and called for detailed assessment of risks and benefits.
“An industry move to T+1 would follow the historic trend towards shorter settlement cycles, and could result in reduced market risk and associated costs,” said Pete Tomlinson, director of post-trade at AFME. “However, a move to T+1 could be the most challenging migration yet because it would remove the only business day between trading and settlement, creating significant pressure on post-trade operations, particularly for global participants.
“The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. 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.”
Settlement has been a huge topic over the past 24 months within Europe, with fail rates notably high and the CSDR regulation landing – enforcing reporting requirements and penalties on market participants for failed trades.
Given these ongoing issues and the previous pan-European settlement system rollout taking up the best part of a decade, experts have often aired frustration when prompted to discuss the notion of now reducing settlement times on the continent.
Issues around corporate actions, cross-border actions and foreign exchange have been highlighted in the past, but the operational challenges are often the biggest drawback to such a move, along with co-ordinating so many countries.
AFME has called for a taskforce to be established to explore the shift to T+1, which is an inevitable move; however, it seems this debate could go on for some years with an air of frustration on the side of market participants.
The full paper can be found here.