From today, 28 May 2024, the US settlement cycle for trades in securities moved from T+2 to T+1.
The move by the Securities and Exchange Commission (SEC), signposted in February 2023, resulted from recommendations made following US market events relating to GameStop in 2021 – the aim is to reduce credit, market and liquidity risks and increase efficiency. The move will be watched closely in Europe – lessons learned in the coming weeks (including any short-term increase in settlement fails) will inform scoping work on a possible move to T+1 in the EU and the UK.
While the EU and UK settlement frameworks continue to operate on T+2, European Commissioner Mairéad McGuinness signposted at the European Commission's January 2024 roundtable on the shortening of the settlement cycle in the EU that “…the key question…is not if Europe will make the move to T+1 settlement…the key issue is when and how we move.”
With the US, Canada and Mexico now on T+1, the two most significant issues identified by ESMA as arising from / exacerbated by the different settlement cycles are:
- the compressed timeframe for carrying out post-trade processes, and
- the impact of misaligned settlement cycles between the EU and the main non-EU jurisdictions (such as the funding gap to be covered by EU funds invested in US securities).
ESMA will hold a public hearing on 10 July 2024, at which it will share its thoughts and get further input on its ongoing assessment of a potential shorter EU securities settlement cycle. It published its Feedback Statement on its Call for Evidence on shortening the settlement cycle in March 2024 and plans to submit a formal recommendation to the Commission, with a cost/benefit analysis, in Q3 2024 in line with one of its mandates under CSDR Refit.
The feedback to ESMA's October 2023 Call for Evidence on shortening the settlement cycle was mixed. While it had sought feedback on moves to both T+1 and T+0, most respondents indicated that the costs of a move to T+0 would outweigh the benefits, and wouldn't be achievable in the short or medium term. ESMA is now focusing its efforts on moving to T+1. Before it publishes its recommendation and cost/benefit analysis later this year, it will look further at the potential impacts on securities lending and borrowing, market making, and the repo market; FX trading; cross-border activities; corporate actions standards; and benefits resulting from margin reductions for cleared transactions. It will also look to clarify the possible impacts of T+1 on retail investors, and examine any necessary legislative and regulatory action, including transitional measures, which could help ensure a smooth transition to T+1. It has been encouraged to consult with Asia-Pacific-based investors, and to consider lessons learned over the coming weeks in the US, before finalising its recommendations.
Work on a potential move to a T+1 settlement cycle is also continuing in the UK, with the publication of the Accelerated Settlement Taskforce Report in March 2024 – that report recommended a UK move to T+1 by end-2027 and encouraged close collaboration with European jurisdictions to see if a coordinated/aligned move to T+1 is possible.
Further analysis is also awaited from the European T+1 Industry Task Force (comprising, among others, AFME, ICMA, ISLA and EFAMA) following its April 2024 statement, which is expected to take account of lessons learned from this week's US move to T+1.
See here for more information on the impact of the US move to T+1 on Irish funds.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.