On October 11, 2027, the EEA member countries, the UK, and Switzerland will shorten the settlement cycle for securities trades from T+2 to T+1. The shorter settlement cycle aims to improve efficiencies and reduce risks for both investors and market participants by allowing for more efficient allocation of capital, increased liquidity, and reduced counterparty credit exposure.

While the new compressed cycle is estimated to reduce operational processing time by 80%¹, the European transition presents additional complexities relative to that in North America as the change will impact a greater number of jurisdictions, currencies, and market infrastructures.

To prepare for the change, managers are prioritizing automation and integration across their operating model. Given the breadth of impact on an asset manager’s overall business, firms are encouraged to review their full FX operational model and evaluate ways to automate manual processes and modernize technology.

Implications for the FX market

Beyond the impacts to settlement, liquidity, and operating models, the European move to T+1 will also impact FX trading activity globally.

The compressed timeframe leaves very little time to match equity trades, generate and execute the FX required to settle them, and resolve any trade breaks, leading to FX trades likely requiring execution on trade date for settlement on T+1. For managers outside Europe, particularly in Asia, this may require local presence to manage such activity during the European trading day. An automated or outsourced solution could alternatively be leveraged to support the required trade management and FX execution.

Alternatively, managers can execute the FX on the morning of T+1 for same day settlement. This option brings other risks, including the potential of not being able to rely on risk-mitigation market infrastructure such as Continuous Linked Settlement (CLS)². Managers would be left settling those trades directly with their counterparties, increasing settlement and counterparty risk as well as the risk of settlement fails that incur Central Securities Depositories Regulation (CSDR) cash penalties in EU markets. Another notable risk is missing settlement cut-off times for Asian currencies, which occur early in the global trading day.

Regardless of the approach, some European currencies are unavailable on CLS, requiring analysis of additional market implications. Additionally, managers will need to make accommodations for when T+1 falls on the holiday of a currency and be prepared to potentially pre-fund in certain circumstances.

How will this affect managers with FX desks?

We expect most managers to initiate a review of their security trading, FX program, and trade management processes to validate that all workflows are effective from a risk mitigation standpoint and efficient from the broader operating model view.

To accommodate the compressed cycle, larger managers who do not currently have a European presence may look to open a European FX trading desk, while other managers will see this as too costly. Some managers may trade more of their FX flow directly with their custodian(s) while others will look to outsourcing to solve for T+1.

Next steps

In preparation for European T+1, managers should consider reviewing their current FX workflows, particularly the time of day when they are placing an FX order, as well as their trade management processes.

While there are multiple paths to T+1 readiness, managers who prioritize automation and technology modernization across their operating models will be best positioned to capture lasting, outsized value.

For more information and practical insights on T+1, contact Ricky Ellis, and follow BBH Investor Services on LinkedIn.