The Association for Financial Markets in Europe published a report outlining the recommendations for a move to T+1 in the EU made by its European T+1 industry taskforce (EUT+1TF).
It is clear that a move to T+1 would be a complex, multi-year undertaking, and requires the collaboration of all industry stakeholders to ensure that new risks are not introduced nor any damage to existing efficiency, liquidity and functioning of EU securities markets.
The primary focus of this report is, therefore, on the question of “how” the industry can move to T+1 safely and efficiently, and make this a success. The preliminary analysis identifies a number of recommendations for both public authorities and industry participants.
Generally, these can be classified as required implementation steps – i.e. the core necessary changes to the existing legal, regulatory and operational framework required to facilitate a move to T+1 – and measures to support settlement efficiency – broader changes that would help mitigate the risk that a move to T+1 results in an increase in settlement fails or a loss of other efficiencies.
EUT+1TF also considers other regulatory actions that would help support a successful transition, and other market-driven changes that would address potential issues in related processes and functions, such as corporate action processing, FX trading and settlement, and those related to securities financing transactions (SFTs). In this context, it is important to keep in mind the broader complexities in Europe and remaining post-trade barriers which this report also touches on. A renewed push to tackle these barriers would greatly facilitate a transition to T+1 and should continue to be a priority that is being pursued in parallel.
Finally, the report also provides some reflections on the question of “when” the EU should move to T+1. Depending on the exact definition of what regulatory, technical and operational changes will be required, EUT+1TF members generally consider that, once a firm transition date is communicated, a transition period of between 24 and 36 months will be required, reflecting the complexity of the market infrastructure landscape in Europe.
A range of views were expressed as to whether H2 2027, the date identified for the UK transition, also could be a feasible implementation date for the EU. The Task Force remains highly supportive of a coordinated approach across the entire European region, including the EEA, the United Kingdom and Switzerland.
“As a next step, we call on public authorities to make a formal commitment to move to T+1,” AFME wrote in a statement.
Summary of recommendations:
- If a decision is made to move to T+1, a realistic implementation date should be decided upon and communicated with the maximum possible notice period.
- CSDR Article 5 should be updated to mandate a maximum of one business day between trade date and intended settlement date for transactions executed on trading venues in in scope transferable securities.
- SFTs should be explicitly exempted from CSDR Article 5, but broadly no other changes to the existing scope shall be required.
CSDR Article 5 typically involves additional processes and market actors, including trading venues, CCPs and clearing members.
According to the AFME report: “While SFTs generally settle on a shorter basis than the underlying cash trades, it is important to note that SFTs themselves are not subject to any standard settlement cycle and require full flexibility in terms of settlement, to meet dynamic funding and inventory management needs and ensure the smooth and liquid functioning of the market.
“The fact that CSDR did not explicitly exempt SFTs from the scope caused problems and confusion, specifically related to forward-forward repos which meant that these could not be traded on venue. This problem had to be subsequently addressed at the level of individual markets and through best practice. It is worth noting that forward-forward repos represent a significant share of the market.”
Recommended transition steps
- Public authorities should consider a temporary suspension of cash penalties over the implementation period.
- Public authorities should avoid implementing complex changes to the Central Securities Depositories Regulation (CSDR) cash penalty rules in advance of the transition to T+1.
- Coordinate closely with public authorities in the United Kingdom and Switzerland.
Settlement efficiency support:
- Article 2 of the RTS on CSDR Settlement Discipline should be updated to enforce completion of the allocation/confirmation process on the business day prior to intended settlement (i.e. typically T+0), and for this information to be exchanged in electronic, STP format. An extension to 10.00 CET on T+1 should be permitted for transactions involving a timezone difference of more than two hours between the counterparties.
- ESMA should consult as planned on “measures to reduce settlement fails”, and make a determination as to (a) whether further regulatory changes are necessary to support enhanced settlement efficiency, and (b) which of these changes, if any, should be sequenced before a move to T+1. Actions for Industry Participants