This article was originally published in Funds Europe (January 2025) as part of the T+1 Settlement in Europe Special Report.
As the EU and the UK prepare to migrate to a shortened settlement cycle, what lessons can be learned from the US which has already made the move to T+1? An expert panel spanning the sell-side, buy-side and market infrastructure operators discussed the critical issues.
When the US announced its intention to shorten its securities settlement cycle from two days to one (T+2 to T+1), there was an inevitability that the EU and UK would have to follow suit – to avoid a funding gap for any transatlantic trades and also to keep pace with best practices in operational efficiencies.
So, now the US has been operating on a T+1 basis for some time, can the migration be termed a success and can the UK and EU create the same potential benefits in their own moves to shortened settlement cycles? This was the opening question of a roundtable held by Funds Europe in partnership with the Depository Trust and Clearing Corporation (DTCC) on the subject of T+1.
Related: Accelerating Settlement Cycles in Europe
According to Sachin Mohindra, who acted as the initial lead for the US T+1 project for Goldman Sachs, the early statistics provided by the DTCC show that affirmation rates have been at an all-time high and continue to be very high, suggesting it has been a success in terms of settlement efficiency.
Mohindra also referred to the drive for greater automation which underpinned the move to T+1 which requires a two-way commitment to make sure transactions are all allocated, confirmed and affirmed on the same day. “You need investment on both sides to make that work and T+1 was the catalyst to do that.”
There have been clear improvements in three areas, said Mohindra – margin reduction, post-trade efficiency and convincing the rest of the world that moving to T+1 was the right thing to do. Consequently, other regions are considering the same move.
Another important point is that things have not got worse, said Jaime Healy-Waters, Citigroup, T+1 project sponsor in the US. “There was a lot of nervousness around what would happen to settlement efficiency rates. They have remained the same, which is a positive.”
There was a certain inevitably that the EU and the UK would both have to follow suit once the US decided to pursue T+1, even if the EU initially led the way on T+2. However, as Martin Ware, European head of counterparty operations at Vanguard, said, it has always been the trend to reduce settlement cycles over time, albeit on a gradual basis.
However, when it comes to the UK and EU, it will not be simply case of repeating the process due to the added complexities in these respective domiciles, said Andrew Pinnington-Mannan, head of client strategy, DTCC. “There is a multi-market jurisdiction and a post-Brexit landscape to consider now so it is harder to replicate the US T+1 model or to even think about T+0.
The European Securities and Markets Authority (ESMA) and the EU have recently announced its intention to move to T+1 in 2027, whereas the UK announced its own plans last year. And while this still seems a long time away, if the US hadn’t moved, would Europe have sat on T+2 for a longer time, asked Mohindra. “We won’t know now but the US has certainly accelerated the global perspective of achieving T+1.”
The misalignment between the US and elsewhere is not ideal for global clients, said Healy-Waters. “But the UK was adamant that it was going to go ahead anyway and that has helped speed up the EU.”
As the world’s largest capital market, the US was the perfect choice, said Matt Johnson, director, ITP Industry Relations, DTCC. “If the US could do it seamlessly with 95% plus same day affirmation rates and little to no impact on the fail rates, then so can the EU and the UK.
“My own feeling is Europe will focus more on settlement efficiency whereas the US was focused on affirmation rates because the affirmation process doesn’t exist anywhere but the US and it was backed by both the Federal Reserve and the Securities and Exchanges Commission (SEC) so there were strict mandates. The affirmation process is unique to the US market and a change to that process required changes to SEC rules,” said Johnson.
“That regulatory impetus certainly helps and until now, it has been lacking in the UK and EU. ESMA has announced the date (October 11th) and is going to play a more pivotal role but the UK is still very much in code-of-conduct mode and without that regulatory backing. So it will be interesting to see if that changes in the next 18 months,” said Johnson.
“T+1 in Europe should act as a catalyst to improve settlement efficiency - that’s the name of the game here,” said Mohindra. “But how do we develop common solutions that address the settlement efficiency issues and provide a common interest and incentive for both the buy and sell side? We are up against time but hopefully we will be pragmatic because there are commercial and operational risks to be considered.”
Another difference between the US and UK/EU is affirmation versus efficiency. Affirmation rates in the US are very high but settlement rates have remained the same, so why is that the case, asked Healy-Waters. “There’s a lot of analysis going into that lack of correlation. It would be even more complex in the EU/UK because of the different jurisdictions. If you don’t have that efficiency, you won’t have the information on your positions or your liquidity and how do you move your liquidity in a settlement cycle with one less day. That efficiency is key otherwise it could be disastrous,” said Healy-Waters.
For buy-side participants, there will be an issue over knowing the state of their inventory, said Johnson. “The multiple central securities depositaries (CSDs) operating in the region will have to come to the table and agree on when various trade cut-offs are going to be enforced within a T+1 context.”
Lessons to be Learned
The US T+1 process has been in place for almost a year now and for Mohindra, the lessons that can be learned are the importance of defining a very clear scope which is important for both buy and sell-side.
“Having sat on the Securities Industry and Financial Markets Association (SIFMA) T+1 steering committee, leading up to the implementation date, the clarity around what was practically in the scope for T+1 in the US wasn’t great. Yes, there was an exemptive order that was last updated in 1995, that relates to an exemption from SEC Rule 15c6-1 for certain transactions in foreign securities, but it remained unclear what market participants should do in certain cases in today’s modern world with the rise of cross-border settlement and multi-listed securities.
For example, what was the process for a non-US equity which was listed in the US and settling in the US or a US bond settling outside of the US?
“From a practical and pragmatic perspective, we needed something that was more workable for the buy side and sell side,” said Mohindra. “We came up with a set of voluntary recommendations for foreign securities that went above and beyond the SEC rules and ensured there was a uniform approach regardless of where you settled these securities around the world.”
But those recommendations only made it out to the industry three months before the implementation date, which was somewhat concerning, said Mohindra. “Even though it was a one-off reference data update for everybody across the street, it was really important we made that change correctly to avoid any scope related issues and challenges.
“Goldman Sachs has been involved in the UK’s T+1 task force and technical group over the last year and one of the first things we put forward is the need to define the scope as early as possible. The UK’s recommendations and proposals came out in October this year. The consultation period has just finished and we’re near finalising the UK scope and that’s three years before potential go live,” said Mohindra.
That was completely different to how the US had done, said Healy-Waters. “They were more top down as opposed to bottom up, with us making recommendations of how it should and will work.”
Counting the Cost
It is not easy to ascertain the cost of the migration because some firms have got better technology stacks than others and have invested more in things that will make the transition easier, said Johnson.
“The point is, it is not just one thing – so it is very hard to quantify. There have been calls for more cost benefit analysis but it is difficult for a bank or a buy-side firm to come out with a number – partly because the mis-alignment across firms technology stacks makes it difficult to do this accurately and consistently.” added Johnson.
Healy-Waters said that it was difficult to put a number on it because of the legacy upgrades and the like. “But we certainly drilled in and poured as much as we could under the T+1 banner and that has paved the way for what we need to do in the UK and Europe, certainly in the middle office space.”
T+1 also highlighted the mechanics of the US market, said Mohindra. “There’s a huge EB-PB central clearing element within the US market that doesn’t similarly exist elsewhere and which creates an optimised settlement workflow. And that raises the question of why such models don’t exist in other jurisdictions like the UK and the rest of Europe,” he said.
“And now we’re having the same conversation around what works in Europe and is not in the US. We are starting to see more cross-pollination of ideas and concepts. That’s something we starting to learn from T+1. The shorter we make the settlement cycle, the more opportunity there is to harmonise technology across jurisdictions,” said Mohindra.
There is also an education element to consider, said Johnson. “There was a view that everybody knew how the US market worked from a post-trade perspective. But it soon became apparent that lots of people in Europe didn’t know what affirmation meant and there was this confusion that it was the same as matching when they are actually two different processes. It will be important to understand what can and can’t be done in the European market because it is so fragmented.”
It is also worth noting, said Mohindra, that the SEC’s original proposal was about shortening the settlement cycle and not specifically for T+1. And most of the SEC’s supplementary questions to market participants in the initial rule proposal were related to T+0. “But we ended up going from T+2 to T+1 because we all needed to be in lockstep. Another reason was that T+1 is largely achievable with existing technology, albeit with some new technology for satellite functions like inventory management. Moving to T+0 would require a complete rethink of how everything works. Maybe some of the big tech solutions will emerge for the industry to latch onto but there is still time,” said Mohindra.
Johnson agreed that T+1 is a stepping stone to T+0 at which point a vendor may take advantage of the lack of standardisation and develop software that could make the inventory management process more efficient.
It is also a concern for firms that have not implemented their T+1 in a way that could enable T+0 as part of a broader modernisation program, noted Pinnington-Mannan. “There is a significant number of firms in that situation and it will need to be addressed.”
A Measure of Success – Trades with Benefits?
Is there really a benefit for European and UK participants other than aligning with the US? Will it lead to a greater STP and fewer settlement failures due to less friction in the post-trade process?
One benefit is making sure that there is global alignment to the settlement cycle and to avoid the balance sheet inefficiencies and the funding friction that misalignment causes, said Mohindra. “In Europe, we need to consider moving to T+1 for our own benefits. Yes, there are steep opportunities and yes it drives investment in post-trade processes. But according to ESMA’s proposals, there is estimated to be a 42% reduction in central counterparty (CCP) margin requirements for securities, which amounts to around €2.4 billion.”
There has not yet been the same full assessment in the UK but Mohindra hopes the same benefits can be realised because it will free up liquidity by preventing collateral being trapped to satisfy CCP margin requirements. “And reducing margin requirements may actually make clearing more attractive for certain market participants who had not considered it before. That is why T+1 is beneficial for Europe,” said Mohindra.
Does that money get reinvested into technology and infrastructure, or is there an increase in funding for the buy-side so that they can trade more? Or does that money simply get absorbed in all the extra costs involved?
Healy-Waters bemoaned the market’s inability to properly analyse its costs. “As a whole, the industry’s ability to articulate benefits is very challenging and compounded by the complexity of the European infrastructure.”
“In addition to the cash management benefits from T+1, the funding gap is something that will absolutely be helped by more harmonisation in settlement cycles and continued investment in automation and operational efficiency,” added Ware.
There is a political angle to T+1 as well, suggested Johnson. The Capital Markets Union (CMU), now known as the Savings and Investment Union (SIU), was always a buzzword for the last decade across Europe. “It was all about securitisation and more infrastructure investment. So you could argue that the US, UK and EU all moving to T+1 makes the markets more efficient. But can you prove it?” asked Johnson.
There are some regional differences that make it hard to prove the efficiency. For example, there is not the same retail sector in Europe and the UK that there is elsewhere. T+1 could also led to more consolidation among market infrastructures, said Johnson. There are roughly 39 CSDs and 19 CCPs operating across Europe. “Maybe some of the bigger CSDs get bigger and maybe some of the smaller ones partner up so they can protect themselves.”
If there is a political angle to T+1, it is that it is designed to support the SIU initiative and existing projects like Target2 Securities (T2S) – the ECB-led, pan-European trading platform for securities.
An interesting development from the US is the change in operating and funding models, moving from a prefunded model, which is a drain on capital, to more of an automated model where the dollars need to be in place as quickly as possible, which can be expensive, said Johnson.
“We did see huge parts of Japan remain booking US transaction on T+2, which was approved by local authorities and policymakers. The local broker takes the risk. But it does raise the issue of timing on a global scale,” said Johnson. “If the US starts to look at moving to T+0 in the next decade, there might be a global move to the T+0. Other jurisdictions would then have to consider whether they are still moving to T+1, seven years after everyone else, or instead aim for something else.”
As Johnson noted, as of writing it appears that there are no Asian jurisdictions looking to align with the UK and Europe. The earliest would be 2028. “It’s going to happen but it will be after the UK and Europe,” he said.
The importance of collaboration is another lesson learned from the US experience. “Industry participants from both the buy-side and the sell-side need to work a lot more closely with the regulator and build that relationship,” said Mohindra. The most significant post-trade regulatory change in Europe recently has been the CSDR Settlement Discipline and in that instance there was a feeling across the industry that the regulation had already been set and we collectively had to work really hard to steer it in a way that was pragmatic for the market, especially for cash penalties and mandatory buy-ins.”
The UK and EU projects have been positive processes thus far in terms of coordination, said Mohindra. In the UK, the Edinburgh Reforms were announced back in December 2022 and the government formed a taskforce to bring the industry together. Initially this taskforce comprised those that had put their hand up first. “But it was soon clear that it was not representative of the entire industry and there needed to be more representation from the trading venues, clearing houses, CSDs and custodians and we needed to cover processes like corporate actions, securities lending, FX and trade matching in further detail.”
This led to the establishment of a technical group, which Mohindra said has been a “real success” in terms of ensuring the membership is comprehensive and the functional coverage is accurate.
“The final recommended proposals came out in October and had a lot of comprehensive, well-considered analysis behind it,” said Mohindra. “The FCA, Bank of England, Prudential Regulatory Authority and His Majesty’s Treasury have all been participating and consulting on the direction of travel so there is a good partnership there.”
In Europe, it is a similar story. ESMA has put out its own report and held some industry roundtables, including one held by the European Commission in Brussels in January that also had an open hearing where market participants were invited to contribute. “We are seeing participants and policymakers working together and hopefully that will continue and result in a more considered implementation,” said Mohindra.
The regulators should support harmonious and aligned implementation model where regulations and interests are aligned, added Pinnington-Mannan. “By creating the task force, everyone is part of the conversation and it gives the regulators comfort we are working as an industry for the benefit of the end investor.”
There is still some way to go though. “The CSDs and CCPs need to be honest about what is feasible and to share any concerns or common ground,” he added. For example, how old are their tech stacks and can they harmonise their systems, noted Healy-Waters. “Our concern is that we don’t see the armies of technical teams working on these technical issues, like changes to overnight settlement batches or overdraft charges for unfunded instruments.”
The firms that tend to be the most engaged are the ones that are most prepared typically, said Johnson. “If firms are coming to this late and just getting feedback from one part of the market, they won’t know what needs to happen. Identifying those key segments and getting them to the meetings is always a challenge in any industry initiative but especially so in this case.”
ESMA has at least been down this path before with mandatory clearing for derivatives and lessons can be taken from that experience, said Johnson in terms of going from the equivalent of an end-of-day batch of confirmations to full electronic matching and mandated reporting.
And despite the fact that the UK is no longer in the EU, there is still a significant dependency between the two regions based on technology, operations and location of staff, said Mohindra. “Some firms will have dual memberships of CSDs and liquidity pools for the same assets in different jurisdictions.”
The UK issued its T+1 proposal first and included a number of potential exemptions should the EU and UK not be aligned but the need for these exemptions will fall away if the two jurisdictions continue to align as they have. For example, the EU and ESMA, the ECB and the EC put out a joint statement to say they would establish a similar governance structure in the EU and there has been regular dialogue between the FCA and ESMA. Consequently, the panel shared a sense of confidence that there is a clear intention among the various authorities in the UK and EU to ensure the migration to T+1 is undergone in a spirit of cooperation, coordination and collaboration.