The Great T+1 Settlement Debate Comes to Europe

November 08, 2022
  • Investor Services
What’s needed before a region with 41 trading exchanges and 31 settlement infrastructures can consider a shorter settlement cycle?

Trade settlement cycles might not get pulses racing like the more emotive debates over ESG integration or cryptocurrency pros and cons, but the sheer volume and scale of securities trading activity makes them more important in many ways. From 2024, securities traded in the U.S. will need to settle on T+1, that’s one day after they’re traded.

The reason the U.S.'s accelerated path towards T+1 is so critical is that its capital markets remain by far the largest in the world.1 While the U.S. market is a single country with a single currency, investment flows from the entire world flow in and out daily, making the U.S. T+1 shift relevant for almost every trading entity in the world. Industry groups have rallied around U.S. T+1 plans and have outlined, in a detailed playbook, a timeline inclusive of trade processing implementation activities and milestones necessary to meet a potential Q3 2024 implementation date. Canada and India are assessing similar moves.

Let’s remind ourselves why. Simply put, the longer a settlement cycle, the more time there is between trade execution and settlement for a trading counterparty to become insol­vent or for the value of a trade to deterio­rate. In other words, the longer its settle­ment cycle, the greater the credit and operational risk attached to the trade. The more risk, the greater the amount of margin and collateral that is required to be deposited with the clearing house to mitigate the potential failed securities trade. It then follows that a reduced settlement time equates to a reduction in risk, as well as margin and collateral requirements. So, any move from T+2 to T+1 is underpinned by a strong desire to bolster the efficient use of capital across the trading markets.

Now the T+1 debate has come to Europe2 with the publication of a new paper from the Association for Financial Markets in Europe (AFME) entitled “T+1 Settlement in Europe: Potential Benefits and Challenges”.3 In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days (T+2).

Let’s look at the key points raised.

The European Market is Not Homogenous

The fragmented nature of European financial markets means they are not as homogenous as in the U.S. In fact, the AFME paper clearly calls out the additional complexity: “Quite simply, there is more to consider, more to change, and more actors to coordinate”. The move to T+1 across the various European venues could be the most challenging securities infrastructure migration yet because it removes the only business day between trading and settlement. Such a move would naturally put additional pressure on post-trade operations, particularly for global participants not operating within European time zones.

AFME strikes a cautionary tone throughout its paper and warns that any “rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.” For this reason, AFME appeals for the creation of an industry task force to conduct a detailed assessment of the benefits, costs, and challenges of T+1 adoption in Europe.

The unique and fragmented nature of the European trading markets are often not fully appreciated by those not directly involved in asset servicing, but AFME outlines a useful table (see Figure 1) which shows it in direct contrast to the U.S. The fragmentation and associated complexity in driving alignment is very evident when you compare the numbers.



(EEA, UK, Switzerland)

Listings Exchanges



Trading Exchanges



Central Clearing Counterparties (CCPs)



Central Securities Depositaries (CSDs)



Local Currencies



The AFME paper goes on to lay out the primary pros and cons of moving to a shorter settlement cycle. The benefits are similar to those highlighted in the U.S. Depository Trust & Clearing Corporation’s U.S. study, including reduced counterparty, market, and credit risks, decreased costs and margin requirements, and helping broader global alignment with many markets beginning to coalesce around the T+1 cycle.

This will help Europe practically but also keep Europe competitive and not considered to be trailing behind global peers in terms of speed and efficiency. 

However, the barriers to the change are far more numerous and challenging in the European context because of the natural market fragmentation described above. The AFME paper outlines some of those hefty barriers to overcome before such a migration can take place across the region.   

No One Said This Was Going to be Easy

A BBH article sets out the main process areas in the securities trade lifecycle that will be impacted by a shorter settlement cycle in the U.S. These affect everybody globally, but AFME covers five main areas most likely to engage European focus:

1.      Shorter Time Frames

There would be significantly fewer hours between trading and the beginning of the settlement cycle for post-trade operational processes and interventions to happen. Interestingly, AFME calculate an 83%, not 50%, reduction in available time in practice for available post-trade processing which will leave 2 hours rather than 12 hours operation time by removing a day between trade and settlement date. 

2.      Increased Settlement Fails

The migration could also lead to an increase in the number of settlement fails in the market, which in turn could be affected by some existing European rules such as incurring cash penalties under Central Securities Depositories Regulation (CSDR) rules or having capital impacts under Basel III requirements.

3.      Greater Global Complexity

International time zone differences will impact the possibility of same-day matching processes for investors from outside Europe, vastly reducing the time available to communicate and resolve any breaks or exceptions. This impact would be particularly significant on cross-currency transactions which have a foreign exchange (FX) component.

4.      Securities Lending

The shift to a T+1 settlement cycle compresses the timeline to identify and recall securities. The compression again could lead to breaks which might subsequently result in CSDR settlement fails and cash penalties, unless there is a modification to existing processes.   

5.      Exchange-Traded Funds (ETFs)

The global composition of ETFs, many of which contain underlying securities from several jurisdictions, can often lead to settlement delays in a T+2 environment, due to time zone differences, market holidays and cross-border settlement complexity. These challenges would be even more pronounced in a T+1 environment.

The scale of securi­ties in scope married to the amount of fragmentation and local nuance that still exists across the European trading landscape mean that there will need to be a high degree of industry coordination across all stakeholders. This would help ensure all impacts are identified and mitigated and the formation of a detailed implementation plan and timeline is undertaken.

For more information on how BBH can help optimize process areas for shorter cycles and to join industry advocacy group discussions, contact your BBH representative and follow BBH Market Insights on LinkedIn where we will be sharing further learnings on this topic in the coming months.    

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T+1 Settlement and Beyond

As the world watches the U.S. market plan for a T+1 cycle for securities settlement, other countries are assessing similar moves. BBH is working with clients to help them optimize their global operating models and support their readiness for this major industry shift.

1 In 2020 alone, the DTCC and its subsidiar­ies cleared and settled US$2.15 quadrillion ($2,150,000,000,000,000) in se­curities trades.
2 This refers to all countries and trading venues in the European Economic Area (EEA), the United Kingdom (U.K.) and Switzerland.

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