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.