T+1 Takes Hold: The Opportunities and Challenges Facing European Markets 

Firstly, we turn to the world of exchange-traded products (ETPs), where ESMA has neatly termed the issue of US cycle misalignment as the ‘Thursday Effect’. This occurs due to the EU-domiciled ETF shares being issued on a T+2 (or longer) settlement cycle, and the constituent US-domiciled shares of the ETF trading on T+1: the authorised participant (AP) may not have the requisite cash on the date that US shares must be purchased, creating a ‘funding gap’. This funding gap must be met to avoid settlement failure for the US-domiciled security purchase, and any resulting cash penalties for failed settlement (these penalties are estimated at EUR 19 million per month for EU-domiciled ETFs alone). However, meeting the funding gap comes at a cost for APs, which are subsequently passed onto investors in the form of higher fees.

For equities, CSDs have struggled to adapt to the misalignment of corporate action dates, particularly for dual-listed securities. The two primary approaches of tackling this issue – i.e. either for European key dates to match North American markets, or for European key dates to follow existing market standards – have both been considered by the European CSD Association (ECSDA), each creating different issues. Preserving the key date misalignment means that a security could simultaneously be trading cum-dividend on an American exchange, and ex-dividend on a European exchange. Alternatively, by aligning with US corporate action dates, trades executed before the security goes ex-dividend will settle after record date, inducing higher volumes of market claims. 

However, what is more important than the esoteric reasons listed above, is simply that the industry groups have expressed fears of losing competitiveness with faster settling markets; the reduction of counterparty risk, lower margin requirements, and improved market liquidity, all provide investors with motives for relocation.

Overcoming obstacles

Now that the reasons for the transition have been presented, we can move on to the next question: what hurdles must be overcome in the European post-trade landscape to facilitate a successful T+1 transition? 

Financial market infrastructures (FMIs), custodians, and their clients will need to reacclimatise to a new distribution of trades throughout the day. The compression of settlement processing time could present issues for European markets, as the greatest number of transactions tend to occur during the overlap of US and EU trading windows (towards the end of the European trading day). Currently, most of the largest European markets utilise the Target2-Securities (T2S) settlement platform, which runs a series of night-time settlement (NTS) and real-time settlement (RTS) batches. Based on current settlement cut-offs for T2S NTS, this will give two hours between the time that final transactions are entered and the first NTS batch (as most trading venues close at 6:00pm CET and the first NTS batch starts at 8:00pm CET). Whilst any trades which cannot be settled during NTS can be completed during the RTS window (during the day of T+1), this could present a small liquidity issue: during NTS, technical netting is used first by default, but during RTS, gross settlement is attempted before net settlement, and a surcharge is applied to the transaction. Thus, if in-T2S FMIs fail to adapt, it is likely that netting efficiency will fall, precipitating liquidity issues, and prompt costs for brokers and end investors to rise.  

A quick fix for the problem of the compressed processing windows for intermediaries would be to close markets earlier – as is the case in the US - but this would come at a cost to APAC investors’ access to European markets. The view of the European T+1 Industry Task Force was to retain the current variety of trading windows and to adapt post-trade processing around these timings. This is expected to put a strain on communication processes between CCPs and their clearing members and likely require a substantial investment in automating processes such as reconciliation and transaction reporting ahead of T+1 implementation.  

The proposed solution to allaying the industry’s concerns about falling NTS settlement rates is to delay the first NTS cycle (currently at 8.00pm) and to create an additional NTS batch between 6.00am – 8.00am, providing more time for domestic investors and a window for APAC investors to benefit from technical netting.  

Across the Channel, CREST will extend its closing time from 3.45pm to 9.00pm; the BoE’s RTGS payment system, CHAPS, is expected to begin from as early as 1.30am in 2027 (and may adopt continuous operation by 2030), although this is not yet confirmed. These changes should serve to decongest the instruction processing flow and improve accessibility to international investors.

Future landscape

What can we expect European markets to look like in a T+1 world? Well, quite possibly, remarkably similar. It is important not to lose sight of the contemporary presence of T+1 and even T+0 settlement in these markets, particularly for sovereign debt. Whilst there are the aforementioned complexities with handling equities on a shorter settlement cycle, the complexities of settlement misalignment with other markets, will be resolved. Additionally, the fundamental benefits of shortened settlement cycles should help restore competitiveness to these markets in the form of reduced investor fees, less tied up pending-settlement-capital, lower margin requirements, and reduced counterparty exposure. So, to answer the question, not markets which are completely reinvented, but quietly reinvigorated. 

The contemplative post-trade sage among you may wonder whether other markets will already be on their way to T+0 before the trailing European markets can catch up. In India, progress is being made rapidly in this area, although this is optional and not adopted for foreign investor transactions. However, evidence from the US T+1 transition suggests that this is still some way off yet; a small majority of banks and brokers have increased staff headcount to cope with the tighter processing constraints, indicating an underlying air of reluctance around automation investment. To put it plainly: T+1 encourages all stakeholders to automate post-trade processing, whereas T+0 will demand wholesale restructuring of international capital markets to support instantaneous cross-border funding, and fully automated ’atomic settlement’ which will require further advancement in digital asset technologies including the seamless interconnectivity of multiple blockchains and legacy technologies.  This is a future state being actively explored by multiple digital sandboxes but is still some years away.  

The UK’s AST’s T+1 implementation report might even stir a feeling of cautious optimism. It is evident that the AST sees automated processing as an absolute priority – a priority that the Swiss and EU transition roadmaps would do well to reiterate.  

The targeted transition date of 11th October 2027 provides a healthy transition period for these markets (over double the length of the USA’s) to invest in automating post-trade processing and back-office functions. However, the leniency of the timeframe compared to the USA reflects the distance that intermediaries, investors and regulators must travel before the transition: the idiosyncrasies of the diverse European markets will not solve themselves overnight.