Chair of the European Securities and Markets Authority (ESMA) Verena Ross made remarks at a recent public hearing on shortening the settlement cycle.
Based on market feedback from ESMA’s call for evidence, Ross highlighted some key issues:
- Shortening the settlement cycle represents a significant change to the way in which markets operate today and this applies at all levels of the value chain: from CSDs, to investors going through CCPs, trading venues and intermediaries. All actors along the trading and post-trading chain will have to adapt in order to meet tighter deadlines not only in relation to trading but also for other more complex activities, such as securities lending, repos and FX trading.
- Indeed, shorter settlement cycles mean less time available to carry out all the necessary post-trade processes. But time is risk and time is money. The compression of the settlement cycle will imply a reduction of the risk in the system, which should translate into lower margin requirements. These benefits together with the efficiency gains are not negligible.
- Also, some jurisdictions have already moved to T+1 and our strong interconnections with some of them, in particular the US, means that many EU stakeholders now have to deal with misaligned settlement cycles. This brings complexity, costs, and risks. We have seen some of these consequences for the asset management industry, in particular for ETFs invested in securities in jurisdictions with a different settlement cycle and also for issuers who look for funding in the EU and in the US and face the complexities of misaligned settlement cycles for their corporate events.
- Increased efficiency in the way we operate, with lower risks, lower margin requirements as well as international realignment should overall contribute to the competitiveness of EU markets.
- However, the process to get to T+1 in the EU will be complex. It will likely require changes in CSDR, in existing Level 2 regulations and potentially further regulatory guidance. It will also require the industry to work together to find solutions to some of the identified challenges and put them into practice through market standards. Such a project, in an environment such as the EU financial markets, with multiple market infrastructures, currencies, and a broad range of market participants, calls for a robust governance allowing us to make progress together towards the common goal of more efficient markets.
- As from when we move towards shorter settlement cycles we will have to look at our neighbors in continental Europe. Our markets are strongly interlinked and a misalignment in the settlement cycle between the UK, the EU and Switzerland could be damaging.
- North America has completed what seems to be a rather smooth transition to faster and more efficient settlement cycles. The benefits in terms of margin reductions appears to match expectations announced before the transition while settlement efficiency seems to remain at or similar to pre-T+1 levels. As we look at successful international experiences in shifting to T+1, we need to understand what has worked, what could have been done differently and what we can learn from these in order to leverage that experience and ensure that an EU shift will be successful. The European Union has very specific characteristics and the experience from other jurisdictions is not always automatically transferable. Yet, I trust there are things we can learn from other jurisdictions and benefit from.
“We will submit our report on T+1 to the European Parliament and the Council at the latest by mid-January 2025, as required by CSDR Refit. While we finalize it, we will continue our engagement with all stakeholders to ensure we are all on our marks and getting set for the moment when a decision is taken and the ‘go’ is given,” Ross said in her remarks.
At the meeting, European Commission policy officer Sebastijan Hrovatin said that the fourth quarter of 2027 was a realistic timeframe for the shift to happen. He added that any date “put on the table” by the commission will reflect what the EU executive body thinks is “realistic and acceptable”, as cited in The Banker.