ESMA Chair Verena Ross, speaking at ESMA's 10 July 2024 public hearing on shortening the settlement cycle, observed that "[we] in the EU need to continue our journey towards more efficient post-trade processes in this "instantaneous everything" world...and in this way contribute to more efficient and more attractive EU capital markets."
The hearing followed ESMA's publication, in March 2024, of the Feedback Statement on its Call for Evidence on shortening the settlement cycle and the US settlement cycle's move from T+2 to T+1 on 28 May 2024 (read our earlier briefing here: US moves to T+1 settlement cycle; ESMA recommendation expected in Q3).
ESMA now plans to submit its report on a potential move to T+1 by mid-January 2025. It is also working on a cost-benefit analysis and a detailed roadmap of how such a move could occur.
Key discussion points from the public hearing included:
- Following the US move to T+1, the misalignment of the EU and US settlement cycles has brought costs, complexities and risks to stakeholders. Within the US, the move to T+1 has gone relatively smoothly, with benefits generally in line with expectations. Notably, data shared at the public hearing indicated that the settlement fail rate in the US after the move to T+1 remained broadly consistent with the May average under T+2. The EU will learn from the US experience, both in terms of what has worked well and what could be improved.
- Expected costs from an EU move to T+1 would arise in the areas automation, IT upgrades (including testing), HR, the need for further harmonisation of industry standards, and the potential increase in operational risk and settlement fails. Those costs and the benefits inherent in such a move would most likely be unevenly distributed initially, with key benefits expected to be overall reduction in both risks and related costs (notably, lower margins – 11 CCPs provided data to ESMA which indicated that the estimated margin savings would be in the region of €2.7 bn), eliminating costs inherent in the current US-EU misalignment, and driving more efficient and competitive EU markets.
- Any EU move to T+1 will require legislative change – changes to the Central Securities Depositories Regulation (CSDR) and to existing Level 2 regulations are likely to be needed, together with additional regulatory guidance.
- If the EU moves to T+1, any potential misalignment between the EU, UK and Switzerland will bring challenges.
- A potential roadmap to EU T+1, shared by ESMA at the public hearing, envisaged a 3-year process starting with the publication of ESMA's report (likely mid-January 2025) with legislative proposals running in parallel with industry work on devising solutions to potential technical challenges, and testing. Possible dates for the move (per the poll opened to participants at the public hearing) were Q4 2027, Q1 2028 and Q4 2028, with 70% favouring Q4 2027. Interestingly, end-2027 was also the date suggested in the UK's 'Geffen report' (the March 2024 Accelerated Settlement Taskforce Report) which 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.
Before it publishes its formal recommendation and cost/benefit analysis, ESMA will continue to 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 is also looking to clarify the possible impacts of T+1 on retail investors.
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.