As the deadline for T+1 settlement in Europe draws closer, Xavier Crépin-Leblond, lead summit product manager at Finastra, highlights the associated settlement risks and operational challenges firms may face, the importance of early planning and automation, and how Europe should learn from the US’ example.
The move to T+1 settlement in Europe, mandated by ESMA for October 2027, represents one of the most significant operational changes for European financial institutions in recent history. This historic change will affect markets across Europe, including the UK and Switzerland, fundamentally altering how securities transactions are processed and settled.
This transition follows the United States’ move to T+1 in May 2024, which created ripple effects across global markets. The US implementation proved more challenging than anticipated and European institutions felt these effects acutely, suddenly needing to manage settlement and funding during their nighttime hours.
For European banks, T+1 represents both necessity and challenge. On one hand, the compressed cycle promises greater efficiency, reduced counterparty risk, and improved capital utilisation. Under current T+2 timelines, EU cross-border transactions face twice the risk of counterparty defaults compared to US trades, while capital remains unnecessarily tied up in margin requirements.
The journey ahead offers European institutions a catalyst for modernisation and greater resilience, but also presents significant operational hurdles. As Europe navigates this transition, banks must overcome the complex challenges of multiple market infrastructures, time zones, and currencies while dramatically accelerating post-trade processes to thrive in an increasingly fast-paced and interconnected global marketplace.
Settlement risks and operational challenges
Europe’s path to T+1 settlement is complicated by a fragmented market infrastructure unlike any other region. With securities settlement distributed across 30 different Central Securities Depositories (CSDs), banks frequently must coordinate share movements between multiple depositories. This complex ecosystem – spanning diverse time zones, currencies, and regulatory frameworks – creates numerous touchpoints where settlement can fail.
While T+1 appears to simply halve the settlement window, research from Swift Institute reveals a more dramatic reality: banks will have 80% less time to finalise trades when accounting for time zone differences and foreign exchange requirements. This compression is particularly concerning given that Euroclear research from earlier this year showed that nearly a quarter of market participants had yet to begin planning for the transition.
Trade matching and affirmation represent critical vulnerabilities under shortened timelines. The DTCC recommends that European participants achieve 95-96% same-day matching rates to meet T+1 requirements. Currently, processes with automation achieve over 92% same-day matching, while manual operations lag significantly at below 78.5% – a gap that becomes untenable under T+1.
Standing Settlement Instructions (SSIs) management poses another substantial risk. According to Euroclear, over one-fifth of 2024’s settlement failures stemmed from data issues, including incorrect SSIs. The fragmented infrastructure and prevalence of manual data entry amplify this challenge, as T+1 leaves minimal time to correct instruction errors before penalties accrue.
Treasury operations face particular strain with cross-border transactions. European trading that doesn’t occur within the EU Single Market requires coordinated foreign exchange funding. Banks running FX, cash, and settlement on separate systems lack the real-time visibility needed to accurately forecast currency requirements, forcing a choice between tying up excess liquidity or risking settlement fails.
Exception handling becomes increasingly critical under compressed timeframes. Swift research indicates that industry-wide, 5% of trades already fail to settle on time. Current batch-driven systems weren’t designed for T+1’s rapid turnaround, leaving less time to investigate and resolve mismatches before CSDR penalties apply.
Finally, regulatory reporting requirements add another layer of complexity. Mifid II demands approximately 65 data fields per transaction, while EMIR requires consistent counterparty reporting and near real-time updates on positions and collateral. T+1’s compressed cycle leaves minimal margin for error correction before submission deadlines, increasing compliance risk.
Lessons learned from the US transition
The US transition to T+1 offers European banks a valuable blueprint for their own settlement journey. Analysis from Deloitte from May 2024 predicted that 20% of post-trade and settlement activities would need significant overhauls to meet the demands of a compressed settlement cycle. Automation is critical.
Prior to implementing T+1, DTCC data showed only 69% of all US trades were affirmed by end of day. Post-transition, Greyspark Partners noted this figure jumped to nearly 95%, with improvement even more pronounced for firms using centralised matching solutions. These improvements didn’t materialise without effort – before the transition, most brokers and banks were still relying on manual or homegrown post-trade systems.
Timing also proved critical to success. US market participants who transitioned over a year or more ensured smooth trade flows found Deloitte, while those who delayed faced higher workforce costs managing exceptions. Given Europe’s more complex market infrastructure, starting early is even more crucial.
For European banks, the US experience makes clear that achieving excellence in straight-through processing isn’t optional – it’s essential for reducing risk, improving liquidity, and controlling costs.
Strategic steps for European banks
As European banks prepare for T+1 settlement, strategic modernisation will be essential. Analysis from Deloitte indicates approximately 20% of post-trade and settlement activities will need complete overhauls to support compressed timelines. The roadmap to success begins with prioritising automation across the post-trade lifecycle, enabling real-time processing that can operate within the 80% shorter window available for trade finalisation.
Centralising and standardising SSI data management represents a critical first step. Banks need a centralised repository where SSI details are regularly cleansed and validated to overcome data issues. This standardisation aligns with recommendations from both ESMA and the EU T+1 Industry Committee, enabling faster error resolution when exceptions arise.
Integrating treasury, FX, and settlement platforms provides unified cash and funding visibility -particularly crucial for the significant number of European trades occurring outside the eurozone. This integration ensures treasury teams can forecast currency needs accurately, without overfunding accounts or risking settlement fails due to insufficient liquidity.
Implementing rule-based exception management shifts banks from reactive to proactive oversight. With Swift research indicating 5% of trades currently fail to settle on time, automated detection and resolution of common breaks becomes essential under T+1’s compressed timeline to avoid CSDR penalties.
Similarly, regulatory reporting must evolve beyond manual processes. The extensive data requirements for frameworks like MiFID II and EMIR necessitate automated capture and validation systems to ensure timely, accurate reporting under shortened cycles.
Perhaps most critical is early planning and phased implementation. The US transition demonstrated that firms initiating preparations well in advance experienced smoother adaptation and lower costs. European banks would be wise to begin now, despite the 2027 deadline, to manage the significantly higher complexity of Europe’s multi-market environment.
For institutions that embrace these strategic imperatives, T+1 offers more than just compliance – it provides a pathway to enhanced operational efficiency, reduced risk, improved liquidity, and ultimately, competitive advantage in an increasingly interconnected global marketplace.