The shift to a one-day settlement period (T+1) brings significant challenges, including the need for system updates, standardization, and alignment across the European Union’s financial markets.
T+1 to Enhance Efficiency and Reduce Costs
The European Securities and Markets Authority (ESMA) is gearing up to accelerate the securities settlement process from two days (T+2) to one day (T+1), aligning with global market trends. This move aims to reduce risk, lower costs, and enhance the efficiency of cross-border transactions, but it presents hurdles such as the modernization of post trade systems.
ESMA has emphasized that substantial investments will be required to achieve this goal, with market participants advocating for revisions to the Central Securities Depositories Regulation to support a smoother transition.
Challenges of the Transition to T+1
As financial markets globally adopt the T+1 standard, the EU is pushing to stay competitive by catching up. One key challenge is ensuring coordinated efforts across sectors and regions to guarantee the success of the transition.
Due to the interconnected nature of Europe’s financial markets, a unified strategy is critical. ESMA is collaborating with the European Central Bank (ECB) and the Directorate-General for Financial Stability to prepare for a seamless shift to T+1.
Drawing from the experience of other regions, regulators and market players are working together to ensure technical preparations are inclusive and take into account the diverse needs of all EU sectors and regions.
A Competitive Push for T+1
T+2 has been the standard for settling securities transactions for over a decade, where trades are finalized two business days after execution. However, markets in the US, Canada, and Mexico have already moved to T+1, which accelerates settlement to the following business day.
In response, the EU is evaluating its readiness to adopt the T+1 model, aiming to maintain its competitiveness in global financial markets. ESMA is assessing the potential impact of this shift on EU markets, with early analysis indicating that T+1 could reduce risks, cut costs, and align the EU with other leading financial centers.
The Need for Modernization and Harmonization
The adoption of T+1 is expected to bring multiple advantages, such as lowering the risks tied to unsettled trades and reducing exposure to market volatility. However, this will require significant modernization of the EU’s post-trade infrastructure.
Furthermore, aligning with other regions that have implemented T+1 could streamline cross border transactions, lowering costs and improving efficiency. This could also help strengthen the EU’s Savings and Investment Union, enhancing its overall economic resilience.
As global financial centers increasingly adopt T+1, the pressure is on the EU to act swiftly. A delayed transition could leave the EU lagging behind, with potential negative impacts on its markets.
