Exchange trading hours under the spotlight in ESMA’s T+1 consultation

Most concerns from market participants mirror those seen with the US shift to T+1, with additional worries surrounding exchange trading hours and post-trade windows, fragmentation of the region and increasing penalties.

The European Securities and Markets Authority (ESMA) has released findings from an industry-wide settlement cycle consultation, presenting various viewpoints on exchange trading hours in the context of a shift to T+1.

The European regulator published the report on the feedback received to its call for evidence on shortening the settlement cycle, where it received 81 responses from associations.

Among the responses, the issue of reduced time for post-trade processes was highlighted by respondents, with varying viewpoints on how this can be addressed.

According to ESMA, several associations and individual respondents questioned extending trading hours to accommodate any accelerations of settlement times, with one highlighting that there may be an advantage if there was an earlier official closing time for EU exchanges.

However, one association warned that reduced trading hours would result in a greatly reduced window in which European and American markets would remain open simultaneously – highlighting that EU market volumes are significantly higher during that window.

The possibility of extending market hours is something participants have expressed concern over in recent years. In 2020, buy- and sell-side traders called on the London Stock Exchange and other European venues to shorten equity market opening hours to 9 am to 4 pm GMT, highlighting that the shift could improve the culture and diversity on trading floors and boost intraday liquidity, in response to several industry consultations.

However, exchanges later rejected these bids, following extensive debate, stating that the move would not act as a silver bullet solution for the complex issues around diversity and mental health.

In its report on Thursday, ESMA also stated that a number of respondents, mainly on the buy-side, indicated that T+1 might make pre-matching impossible for them or that they will not be able to afford the extra cost on human resources to get sufficient operational coverage to accommodate T+1 settlement.

Another major takeaway from ESMA’s consultation was that respondents were “almost unanimous” regarding T+0 and have suggested ESMA focus its assessment on T+1. The watchdog said therefore it will focus its work on shortening the settlement cycle on T+1.

With the T+0 window conversation closed, for now, the focus turns to T+1 – which still remains a unique beast in terms of an entire region moving simultaneously.

While many of the concerns raised by market participants mirror those voiced with the US transition, Europe has its own additional challenges due to the sheer number of markets, CSDs, exchanges and CCPs in the region.

In addition, associations highlighted some of the significant time shifts, with one calculating that the available time for post-trade processes in a T+1 environment would be reduced by 82%, from 12 hours to two hours. Another association saw the reduction of the “common working hours” available to finalise the settlement of a transaction drastically reduced up to 92% (from 26 hours to two hours).

Despite these divergent views, many respondents agree on the need to delay the start of T2S night-time settlement (NTS) currently starting at 8pm CET. 

Andrea Gentilini, head of market infrastructures division at ESMA, noted in a social media post that there is strong demand for a “clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry”.

ESMA did note that, overall, views on whether T+1 should be pursued are “quite mixed”.

“Respondents have highlighted a number of operational impacts that go beyond simple adaptations of post-trade processes,” ESMA said. “From a cost and benefit perspective, while respondents have clearly identified the main areas of focus and have clearly highlighted the negative aspects and the costs, together with a number of benefits resulting from shorter settlement cycles, ESMA has received limited quantitative evidence due to forecasting complexities.”

In order for the regulator to produce its assessment on the appropriateness of shortening the settlement cycle and of the costs and benefits of doing so, ESMA stated that several questions remain to be “further assessed and better understood”. These include – but are not limited to – the impacts on securities lending and borrowing, market making, and the repo market; FX trading; cross-border activities; corporate actions standards; and benefits resulting from margin reductions for cleared transactions.

ESMA said it will also aim to clarify the possible implications of T+1 for retail investors and smaller market players.

The regulator will continue to engage with the industry and has been strongly encouraged to consult with investors located in the APAC region.

ESMA said it will seek to publish the report before 17 January 2025.

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