Financial institutions based in Europe’s two largest economies are concerned that shortening the settlement cycle to T+1 across the region could result in a surge in settlement fails, according to research from SIX.
As part of the research for the annual SIX Future of Finance report, which globally canvassed the views of 293 senior financial executives, UK and German respondents (23% and 30% respectively) feel a potential surge in settlement fails is the largest obstacle posed by the transition to T+1.
The findings contrast with what appeared to be growing positivity around Europe’s adoption of T+1, with the Investment Association (IA) – the UK’s asset management trade body – publishing a recent report that exuded confidence.
“The fact that the IA is growing increasingly optimistic around Europe’s realization of T+1 is exciting, but we mustn’t get ahead of ourselves just yet,” said Jesus Benito, head of Domestic Custody & TR Ops at SIX, in emailed commentary.
Trade settlement fails occur when one party in a trade does not complete their part of the transaction on time. For instance, they may fail to deliver the requisite money or securities by the deadline. It is feared shortening the settlement cycle to just one business day – which the US transitioned to back in May– could lead to more failures due to the shorter time frame in which to fix trade issues, confirm details, or move the necessary funds and shares.
Benito said in emailed commentary: “There are fundamental differences between US and European market infrastructures, with the latter much more fragmented and complex. Overcoming these hurdles will require a great deal of co-operation between key market institutions, from exchanges to clearing houses, custodians to sub-custodians. Unless proactive steps are taken well ahead of any agreed T+1 timeline, the fears highlighted by British and German finance executives could well materialize.”