FILS Europe 2023: ‘Unevenness’ of T+1 across markets will have challenges for institutions

With the US set to transition to T+1 settlement in May next year, panelists discussed the impacts it would have on UK and EU markets as well as the challenges associated with following suit with the US.  

In Tuesday’s keynote regulatory panel at the Fixed Income Leaders Summit 2023, speakers discussed the best ways to adapt desks to efficiently meet new industry standards and diverging regulatory requirements, with the US’ transition to T+1 coming to the forefront of the discussion.  

The looming shift to T+1 settlement globally in recent years has represented an almost inevitable evolution of market structure in the never-ending search for efficiencies and risk reduction.  

Earlier this year, the US Securities and Exchange Commission (SEC) voted to shorten the settlement cycle in the US to one business day, with the implementation date set for 28 May 2024. 

With less than a year to go until the go-live of T+1 settlements in the US, panelists discussed the potential shift to T+1 in the UK and the EU, while addressing the potential hurdles that could come with it.  

“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. 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,” said Mathijs Genste, capital markets supervision and policy, AFM.  

Genste highlighted that the central bank window, given that it closes at 18:00, creates a barrier to process payments in a system that is built around multilateral netting. “You would need to address those issues first, making sure that you have sufficient time to do all the necessary processes, essentially needing to go back to the to the drawing board,” he added.  

“I’m quite sure that if we have to design this all again, you probably won’t come up with the framework that we currently have. It’s indeed something that has evolved over time.” 

Elsewhere in the discussion, panelists highlighted the issues that could arise due to a lack of harmonisation of settlement times globally. 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.  

“If you get over those initial challenges of moving to T+1 from a cash settlement perspective, the big challenge in fixed income is if you’ve got the same asset that may be settling on a T+1 basis in the US and on a T+2 basis in Europe, then there’s going to be problems,” said Chris Murphy, chief executive and co-founder of Ediphy.

“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.”