The Association for Financial Markets in Europe (AFME) responded to ESMA’s call for evidence on shortening the settlement cycle in the European Union.
Pete Tomlinson, director of Post Trade at the Association for Financial Markets in Europe (AFME), said in a statement: “Moving to a T+1 settlement cycle will be a complex and demanding undertaking for the entire industry, so it is important that feedback is carefully considered before next steps are decided.
“Any move to a T+1 settlement cycle must be effected in a way that does not introduce new risks, damage the existing efficiency, liquidity and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers.
“If a decision to move to T+1 is made, it will be necessary to define an appropriate timetable that generates industry momentum and provides clarity to market participants.”
Among AFME’s key points are:
- AFME fully supports ESMA’s conclusion that any decision to shorten the settlement cycle in the EU should be based on a proper cost-benefit analysis.
- It is critical that this considers not only the impact on post-trade processes, but also potential broader market impacts on trading and liquidity and the competitiveness of EU markets.
- Any move to a default T+1 settlement cycle must be effected in a way that does not introduce new risks, damage the existing efficiency and functioning of EU capital markets, create barriers to investing in the region’s securities markets, or diminish access to capital markets for issuers, which would be contrary to the capital markets union (CMU) objectives.
- AFME calls for a coordinated approach across Europe, including EEA countries, Switzerland and the UK.
- The North America migration to T+1 in May 2024 represents an opportunity to incorporate “lessons learned” before making a decision in Europe. However, it is important to remember that the complexity of the European post-trade ecosystem could make T+1 adoption a more challenging project in Europe as compared to other jurisdictions.
In its response, AFME encouraged that ESMA’s cost benefit analysis should also give due consideration to potential impacts on broader market functioning – in particular FX and securities lending markets – and any knock-on impact on this might have on trading and liquidity.
“It should be noted that the potential impacts of T+1 on the cost and availability of borrowing securities could result in a more permanent effect on settlement fail rates. Again, it will be instructive to observe how securities lending markets are impacted by the US migration to T+1,” AFME wrote in its response.
“We would also urge that Member States across the Union make the move simultaneously to avoid needlessly promoting dislocation for securities lending and trading that could be caused by Member States implementing divergent effective dates. Further, a coordinated approach across the European region, including the EU, UK and Switzerland would minimize the potential disruption to markets,” AFME wrote in its response.
AFME challenged some of the benefits related to an expected reduction of CCP collateral requirements, which could free up capital to be used elsewhere, potentially generating an improved ROI. However, some market actors have indicated that they do not expect the collateral savings to be significant, and that these must be balanced against the impact of changes to securities lending processes potentially resulting in posting excess margin, reducing capital efficiency, the association wrote in its response.
AFME also added that some issues would still continue occurring even if the EU moved to a T+1 settlement cycle, for examp0ple, securities financing transactions frequently settle on a shorter cycle than the underlying cash trades. Therefore, a reduction in the settlement cycle for the cash market adds extra pressure to these activities.