European alignment on ‘T+1’ securities settlement migration ‘must get political boost’

Mark Shaw, Totis Kotsonis and Mark Ferguson of Pinsent Masons were commenting after the European Securities and Markets Authority (ESMA) recommended that the EU move to a shortened, so-called ‘T+1’, settlement cycle for securities transactions in October 2027.

The ESMA recommendation comes after the previous UK government earlier this year confirmed its support for a move to a T+1 model in the UK by no later than the end of 2027.

In Switzerland, there has no formal confirmation from the government or regulators if the country will move to a T+1 model and, if so, when that migration would take effect. However, ESMA highlighted that industry in Switzerland has “called for the need to move to a shorter settlement cycle ‘for competitive reasons’ as well as for adoption of a coordinated approach in this process at the European level together with the EU and UK” and said the transition to a shorter settlement cycle in Switzerland would be “industry-led”.

Currently, EU law requires certain transactions in transferable securities executed on trading venues to have a settlement date of no later than the second business day after the trading takes place. This ‘T+2’ model has been in operation in the EU – as in the UK and Switzerland too – since 2014. However, there is growing pressure on policymakers and regulators to require next business day settlement to maintain European competitiveness, after the US, Canada, and Mexico moved to the T+1 model earlier this year.

While ESMA’s recommendations closely reflect the UK government’s timeline for migration in the UK, the final EU decision rests with the European Commission.

Mark Shaw, an expert in funds regulation at Pinsent Masons, said it is “critical” for the success of the shift to a T+1 model in Europe that there is “a harmonised approach between the EU, UK and Switzerland”. He said such a move would remove the risk that has attached to settlement timing difference between these jurisdictions and the US since the US migrated to T+1 in May.

“The UK, EU and Switzerland all share the same ultimate objective with T+1 migration and have an opportunity to avoid unnecessary ‘event day’ frictions and risk arising for European fund managers on three separate dates by coordinating with one another to agree on a single migration day,” Shaw said.

“The North American market move to T+1 created ‘event’ risk for European fund managers as well as ongoing operational challenges tied to the shorter overlap in relevant trading hours between the US and European markets and the fact European exchange traded funds (ETFs) exposed to the US market settle on T+2 basis but are exposed to trading securities settling a day sooner, with European regulatory constraints around liquidity and the holding of cash reserves to be factored in. While the risks are smaller in relation to any differences arising between the UK, EU and Swiss markets, they are noteworthy enough for industry that it would be reckless for the three markets not to align on T+1 migration,” he said.

International trade expert Totis Kotsonis and public policy expert Mark Ferguson said the T+1 migration project could be an “easy win” for UK and EU policymakers seeking to demonstrate that closer relations with one another can deliver business benefits – but in a way that does not break any of the ‘red lines’ the new Labour-led government in the UK has set for such arrangements.

Kotsonis said: "Although the EU's plans are likely to be motivated primarily by a desire to ensure competitiveness at a global level, they also have the positive effect of keeping the UK and the EU in close alignment with each other. That said, there is scope for the two to work more closely together on the issue of T+1 alignment and, from the perspective of the new UK government, it is exactly the type of issue that it might feel it can use to rebuild relations with the EU, its largest trading partner, without compromising on the red lines chancellor Rachel Reeves recently reiterated in terms of it rowing back on Brexit.”

Ferguson added: “The issue of EU alignment remains a politically sensitive one in the UK, but there has been a change in not just the tone but also the substance of the approach to EU relations since the UK general election in the summer. A recent tracker published by academic think tank UK in a Changing Europe highlighted that there has been a ‘shift towards alignment’ between the UK and EU since Labour came to power, which it described as a ‘markedly changed approach to managing divergence’ seen under Conservative-led governments in place since Brexit. T+1 migration, on the face of it, is an issue in respect of EU collaboration that the new government is likely to view as possible, practical and politically palatable.”

ESMA was tasked with assessing the appropriateness of shortening the settlement cycle in the EU, the potential impact that change would have on market participants, and the costs and benefits of such a change, and with filing a report on the matter to the European Commission by 17 January 2025. It has now published that report (106-page / 2.03MB PDF).

According to ESMA, while the shift would entail “increased automation, processes upgrades and other implementation costs for all market participants”, there would be “net benefits” to shortening the settlement cycle to T+1 in the EU, adding that retaining the T+2 model would make EU capital markets “appear outdated in terms of technology, processes and approach to risk management, and therefore less attractive as a place to invest”.

“Under a scenario where a T+1 settlement cycle is becoming the global norm, if the EU waits too long, it runs the risk of opening too great a gap with major markets which even if eventually closed will have inflicted damage on the competitiveness of the EU [Savings and Investments Union],” it said.

In its report, ESMA acknowledged the “negative impact” there has been on Europe’s asset management industry and on individual investors in exchange traded funds (ETFs) from the misalignment that has emerged between the EU and US since the North American shift to T+1 earlier this year. It said that negative impact “would increase should the UK and Switzerland move to T+1 at an earlier date than the EU”. The UK and Switzerland, like the EU, currently operate on a T+2 basis.

ESMA said the “global misalignment of settlement cycles” has also caused an impact in relation to corporate events. It said: “The shift to T+1 in the US has resulted in the application of different key dates for corporate events of securities listed or traded simultaneously in the US and in the EU. EU [central securities depositories] and trading venues have opted for different solutions to solve the issue of different key dates, inducing unharmonised practices which bring complexities and risks, further fragmenting EU capital markets.”

ESMA said it would be “desirable” if there was a “coordinated approach in Europe” to T+1 migration and that it would also be “important to promote coordination internationally” with other jurisdictions considering the shift.

Under ESMA’s plans, the T+1 migration project would be delivered in three phases: finalisation of the identification of solutions to technical challenges, implementation and testing. It has recommended that the definition of technical solutions be finalised by the third quarter of 2025, that those solutions are then implemented by the end of 2026, and then that those systems are tested in 2027 ahead of the migration taking effect on 11 October 2027.

ESMA said it favours the 11 October 2027 date for EU migration to T+1 because there are “difficulties linked to the go-live of such a big project in November and December” and “challenges linked to the first Monday of October (just after the end of a quarter)”.