Tuesday, July 16, 2024

Europe Prepares to Follow US Switch to T+1 as Soon as 2027

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(Bloomberg) — European financial markets look primed to follow the US example of switching to a one-day settlement cycle, with officials considering a move in the final months of 2027.

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The European Securities and Markets Authority is lining up the fourth quarter of 2027, the first quarter of 2028 or the fourth quarter of 2028 as potential targets for accelerating security settlement times from two days to one, according to Antonio Ocaña Alvarez, a policy officer at the regulator. In a poll conducted at a public hearing Wednesday, around 70% of respondents called for the switch to happen in 2027.

Europe faces a drawn-out legislative process to speed up its complex market infrastructure. The US, Canada and others transitioned to what’s known as T+1 in late May, and the EU’s financial regulation chief, Mairead McGuinness, has said the “question is no longer if, but how and when” it happens. The UK has said it will make the move by the end of 2027.

“Q4 2027 is realistic,” Sebastijan Hrovatin, a policy officer at the European Commission, said at Wednesday’s hearings. “I don’t think it’s too much of a stretch.”

For now there’s no decision at the political level, but in the background officials are working through the technical hurdles involved in moving to T+1, he said. “Should the Commission decide to move forward, we can hit the ground running.”

Financial institutions across the globe prepared for the T+1 switch in the US by relocating staff, adjusting shifts and overhauling work flows. Those preparations appear to have paid off as the transition appears to have gone smoothly so far.

Europe’s Challenge

A gauge of US trade failures ticked higher to 2.30% following the transition, versus a May average under T+2 of 2.01%, according to a Depository Trust & Clearing Corp. presentation at ESMA’s hearing. These rates are “broadly consistent” despite “some concerns they might rise sharply,” the presentation said.

The transition in Europe could be more complex and costly, however, because the region lacks a unified capital market. Asset managers, banks and trade groups are concerned that settling trades on a T+1 basis could potentially prove disruptive, according to a compilation of responses to an ESMA consultation published earlier this year.

The prospect of three years spent out of step with the US is a challenge for products that invest in securities from both jurisdictions. The UK has said it will try to align its move with the EU if possible.

“The elephant in the room is our joint misalignment with the US,” said Andrew Douglas, chairman of the UK’s technical group on T+1. “It’s incumbent on both of us to get our skates on and align with the US,” he said, referring to the EU and UK.

(Updates with DTCC presentation in seventh paragraph.)

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