UK and EU lay out roadmaps for T+1 settlement implementation
As the US and Canada have already moved to a T+1 settlement cycle, the UK and EU are gearing up for a similar transition, targeting October 2027. However, the European markets face a more complex landscape, requiring extensive operational and technological upgrades.
According to a survey by Firebrand, 28% of respondent firms in Europe have not yet started planning for T+1. The biggest concern about the migration, as noted by Firebrand and BBH, is the potential misalignment of European markets due to the fragmented post-trade landscape in Europe.
Firms in Europe are still using manual processes and receiving batch files without real-time API integration. Phil Flood, global business development director at Gresham, believes that the move to T+1 should be an impetus to change. Some European firms increased automation when the US cut its settlement cycle, but the overall market impact was more limited than expected.
Firebrand agrees with the need to automate as many processes as possible to enable straight-through processing. The top end costs for global custodians could sit at around $36m for those that have a large client base and multiple post-trade systems to update.
The EU and UK are making a commitment to modernize and improve capital markets across the EU/EEA, as stated by John Siena, associate general counsel and co-head of regulatory strategy at financial services group BBH.
Key Differences in Approaches
The US and Canada have already moved to T+1 as of May 2024, with a relatively smooth transition aided by a more centralized infrastructure such as the Depository Trust & Clearing Corporation (DTCC). The UK, on the other hand, has published plans aligned with the EU's but is still in early stages. Some UK firms have increased automation following the US move in anticipation, but overall market readiness remains limited.
The EU faces a more complex financial market structure with numerous trading venues, central securities depositories (CSDs), and multiple currencies. The EU plans to shorten settlement by shifting allocation, affirmation, confirmation, and matching processes to the trade date, requiring near-full automation and better coordination among participants.
Challenges for a Smooth Transition in European Markets
The fragmented market infrastructure in Europe complicates harmonization. Moving affirmation, matching, and settlement tasks to the trade date demands extensive automation and improved error handling. Foreign exchange mismatches also create operational risks that need addressing. Significant technology investment is necessary, and improved communication between custodians, brokers, clearinghouses, and regulators is essential. Cost uncertainties remain, with top global custodians potentially facing costs up to $36 million for infrastructure updates.
Recommendations for a Smooth Transition
Early strategic planning is crucial, with firms completing stakeholder engagement and landscape analysis by the end of 2025 to identify critical pain points and design action plans. Targeting near-full automation of all pre- and post-trade processes close to the trade date is key to meeting shortened deadlines. Enhancing error detection and resolution tools is necessary to handle a higher volume of failed matches quickly. Improved multi-party coordination is essential, with clear communication channels and standardized processes among market participants. Addressing foreign exchange and fund settlement timing is important, and phased and well-communicated implementation is necessary to allow sufficient time for participants to adapt while minimizing disruption.
The EU T+1 Industry Committee has published its T+1 recommendations, focusing on standardization of processes, enhancing technology and infrastructure, and regulatory support. Firebrand Research agrees that the industry needs to begin testing as early as possible to address any problems ahead of the 'go live' date of October 2027.
Firebrand's report, titled Tackling Post-Trade Friction, Supporting a Global Shortened Settlement Cycle, highlights areas in need of more focus, such as foreign exchange, fund settlement cycles, and further automation across the post-trade lifecycle. Both the EU and UK reports focus on automation, with alignment on same-day allocation/confirmation and a commitment to readiness testing in January 2027.
Matt Johnson, executive director for ITP industry relations at DTCC, emphasizes the need for automation in achieving timely settlement. The UK, Switzerland, and the European Union have agreed to move to a T+1 settlement cycle on October 11, 2027.
In European markets, matching finality is reached at the central securities depository. Johnson mentions the possibility of industry-wide external testing between jurisdictions. Flood highlights that DTCC's early testing during the US migration to T+1 was essential to its success.
According to a report from consultancy Firebrand Research, the move to T+1 in North America was perceived as relatively smooth. In the North American markets, affirmation and allocation processes were completed on trade date to ensure any issues could be resolved before the settlement deadline.
In conclusion, the US and Canada’s earlier, centralized T+1 implementation contrasts with the UK and EU’s upcoming transitions that must contend with more complexity, requiring longer timelines, greater automation, and enhanced market coordination to achieve a smooth shift to T+1 settlement.
- The European markets, with their fragmented post-trade landscape, are heavily reliant on technology and automation to manage the transition to T+1 settlement.
- Firebrand Research recommends automating as many processes as possible to facilitate straight-through processing and create a more efficient business ecosystem within the European markets.
- For a smooth transition in European markets, stakeholder engagement and landscape analysis should be completed early, followed by addressing foreign exchange issues, enhancing error detection and resolution tools, and improving multi-party coordination.
