The European Securities and Markets Authority (ESMA), which is the EU’s financial markets regulator and supervisor, has recently released its Final Report providing the assessment of the shortening of the settlement cycle in the EU.
The report aims to highlight that the increased efficiency and resilience of post-trade processes that should be prompted by a move to T+1 would facilitate achieving the objective of further promoting “settlement efficiency in the EU, contributing to market integration and to the Savings and Investment Union objectives.”
ESMA recommends that the migration to T+1 occurs simultaneously “across all relevant instruments and that it is achieved in Q4 2027.”
Considering the elements assessed by ESMA, in particular the difficulties and/or challenges linked to the go-live of such a major project in November and December, and the challenges “linked to the first Monday of October (just after the end of a quarter), ESMA recommends 11 October 2027 as the optimal date for the transition to T+1 in the EU.”
ESMA also suggests following a more coordinated approach “with other jurisdictions in Europe.”
Regarding the quantification of the costs as well as benefits, the elements assessed by ESMA reportedly suggest that the “impact of T+1 in terms of risk reduction, margin savings and the reduction of costs stemming from the misalignment with other major jurisdictions globally, will represent important benefits for the EU capital markets.”
As noted in the update, this change will imply some challenges, including amending “the Central Securities Depositories Regulation (CSDR) and the settlement discipline framework, in order to have legal certainty and foster the improvements in post-trading processes to move to T+1.”
In addition to this, all actors of the financial system will need to work “on harmonization, standardization, and modernization to improve settlement efficiency.”
This will reportedly require “some level” of investment.
The complexity of a trading and post-trading environment such as the EU capital markets means that this project will “require a specific governance to be put in place.”
After the release of this report, ESMA will reportedly be focused on continuing its regulatory work that is related to the revision of rules on settlement efficiency, and “addressing the T+1 governance together with the European Commission (EC) and the European Central Bank (ECB).”
