Tackling settlement inefficiency in Europe must take priority over shift to T+1, say experts

With fail rates high due to market volatility and penalties pouring in through CSDR, experts are recommending Europe addresses current inefficiencies, or risk complicating matters though a rushed move to T+1.

Despite a huge amount of focus on the US move to T+1 and Europe potentially following suit, the broader notion of tackling settlement inefficiency remains a top priority for all post-trade participants, experts have opined. 

Following the US Securities and Exchange Commission (SEC) vote to shorten the settlement cycle to one business day from 28 May next year, European regulators launched a call for evidence on 5 October to assess the impact of a shorter settlement cycle on the continent; final report scheduled for Q4 2024.

However, with regards to settlement, a number of issues remain in Europe, including relatively high settlement rates, which are now penalised under the CSDR regulation.

A panel of industry experts convened for a joint webinar from the Depository Trust and Clearing Corporation (DTCC) and the Association for Financial Markets in Europe (AFME) on assessing the current settlement efficiency landscape.

“It’s a melting pot of efficiency topics that have come together,” said Sachin Mohindra, executive director, global banking and markets at Goldman Sachs. “If we don’t get the efficiency right and move to T+1 in Europe too soon, then we might end up in a situation where we actually create more inefficiency in the process. If we try to run before we can walk, we could end up giving ourselves an injury in the process – and that’s the last thing we want to do.”

Instead, Mohindra argues, the industry should be focused on preparing the market for a shorter settlement cycle in the right way – which would be to overcome the existing challenges around settlement efficiency within the market. 

To do so, the panel agreed that there needs to be a greater understanding of what is really causing trades to fail in the market. ‘Inventory issues’ and ‘inaccurate SSIs’ barely begin to scratch the surface of the true causes, and more can be done to improve that understanding.

Rollo Burgess, director, consulting – capital markets at Deloitte, confirmed that there are currently serious moves being made to address these inefficiencies, some of which can be put down to the fragmentation in Europe. “There’s a sort of political intent to address that and a number of us were in a meeting that ESMA hosted a few weeks back and that intent was very apparent from the commission and we’re also aware that there’s focus on this in the UK as well, particularly in the context of the move to T+1,” he said. 

Mohindra also spoke to the importance of the role of regulators in improving efficiency, noting that: “The collaborative nature between the industry and the regulator is now more evident. So hopefully we can leverage that and then make European markets more efficient.” 

Other panellists also highlighted the importance of participants from every corner coming together to form a unified and integrated approach to improve settlement efficiencies.

Emma Johnson, executive director, securities services global custody industry development at JP Morgan, made very clear the importance of the entire market banding together, explaining that without a cohesive approach minimal headway would be made.

“No one group has a single answer […] I think there needs to be greater partnership between the regulators, FMIs and market participants to kind of pull all the data sources together, all the perspectives, all the families together and partner to resolve.

“Associations can lead, but members need to do the hard work and implement and find common ground. I think there’s a lot of work to do. We just started at just the start of a very long, very important journey.”

This echoes the thoughts of Barnaby Nelson, chief executive of The ValueExchange, from another AFME discussion earlier this year, wherein he asserted that the idea of setting up settlement teams for failure must be avoided, with T+1 ideally being viewed as an enterprise-wide conversation given that it is fundamentally something that affects various stages, from onboarding, to middle-office allocations, and funding.

Read more – T+1 settlement: The seismic post-trade change impacting the trading desk

Across the European securities markets, there is a continuous debate about the key roadblocks and potential solutions. Panellists at this most recent AFME and DTCC webinar reinforced the fact that there are several significant structural differences to take into account, namely the fragmentation throughout the region where differing regulations and tax regimes are the norm between jurisdictions.

Reintroducing alignment on a global level is an important conversation and requires a different game plan when comparing the US and Europe as jurisdictions consider moving to a similar structure in the future.

“It’s not a simple step, but we need to ask ourselves fundamental questions about how we redesign and rethink infrastructure, not just for T+1, but eventually maybe even for T+0,” said Mohindra.