The European Association of CCP Clearing Houses (EACH) responded to the European Securities and Markets Authority’s (ESMA’s) consultation on shortening settlement cycles
Some of the key takeaways are:
- Shortening settlement cycles – The EACH response considers the move to T+1 and T+0 given that the impact on the processes and operations from compressing the intended settlement date would vary depending on whether the compression is towards T+1 or T+0.
- T+0 – There are ‘types’ of eventual T+0 settlement, from instantaneous settlement through End-of-day netting in T+0. , which could be run in parallel. It is important to understand the differences when considering a move to T+0. The potential benefits that a move to T+0 may bring need to be compared against the current benefits it would remove, such as the loss of netting performed by CCPs to ensure reduced funding requirements and operational needs of markets participants, as well as the loss of anonymized trading. Similar effects are described in the EACH paper ‘Decentralized Clearing? An Assessment of the Impact of DLTs on CCPs’.
- T+1 in the US and the EU – Some US market participants have calculated a potential reduction of margins needs of 24.6% for equity markets in the US. To maximize data comparability, EACH has used part of the US starting assumptions to estimate that a potential reduction of margins of 24.6% in the EU Equity CCPs is possible. This reduction would be equivalent to 0.5% of the total margins that EU CCPs currently hold on behalf of clients, with a related decrease in funding costs for the users of about €41 million ($44.7mn).
- The path to a smooth transition to shorter settlement cycles – To ensure a smooth transition towards shorter settlement cycles, EACH considers that a clear path of industry milestones to ensure that authorities, infrastructures, users of capital markets and other stakeholders and aligned are aligned in considering am efficient transition.