ESMA to Upgrade Systems as EU Aims for T+1 Settlement

Tuesday, 15/10/2024 | 19:03 GMT by Jared Kirui
  • The transition faces challenges, such as harmonization, standardization, and modernization of post-trade systems.
  • T+1 aims to lower risks, reduce costs, and improve cross-border transaction efficiency.
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The European Union is accelerating efforts to reduce the securities settlement cycle from two days (T+2) to one day (T+1), which is in line with international trends. ESMA has highlighted several hurdles, including the need for harmonization, standardization, and modernization of systems across the EU.

According to the regulator, the upgrade will require significant investments, and market participants are advocating for amendments to the Central Securities Depositories Regulation to ensure a smooth transition.

Transition to T+1

As global financial markets increasingly adopt the shorter cycle, the EU is taking steps to catch up. One of the central challenges facing the EU is ensuring that all stakeholders across sectors and regions are on the same page.

With the highly interconnected nature of European capital markets, a coordinated approach is essential. To achieve this, ESMA is working with the European Central Bank (ECB) and the Directorate-General for Financial Stability to lay the groundwork for a seamless transition to T+1.

Given the experience of other regions, close collaboration between regulators and market participants is crucial. Authorities are setting up a governance structure to oversee the technical preparations, ensuring that the process remains inclusive and represents all sectors and regions in the EU.

T+2 has been the standard for settling securities transactions for over a decade, meaning trades are settled two business days after execution . However, countries like the US, Canada, and Mexico have already adopted a T+1 standard, speeding up settlements to the next business day.

This has prompted the EU to assess its readiness for such a shift, aiming to remain competitive in the global financial landscape. The ESMA has been tasked with studying the potential impact of T+1 on EU markets. Preliminary findings suggest the move will reduce risk, lower costs, and align the EU with other major financial hubs.

Coordination Across Europe

Adopting T+1 would bring multiple benefits. It would lower the risk associated with unsettled transactions, potentially saving margin costs and reducing exposure to market volatility . However, implementing this change will require significantly modernizing the EU’s post-trade infrastructure.

Additionally, harmonizing the EU with other regions following the T+1 model could streamline cross-border transactions, reducing misalignment costs. Improving efficiency could also help strengthen the EU’s Savings and Investment Union, boosting economic resilience.

The EU is under pressure to avoid falling behind other global financial centers, particularly as more regions embrace T+1. Failure to act quickly could prolong the misalignment with major jurisdictions, potentially amplifying negative impacts on the European market.

The European Union is accelerating efforts to reduce the securities settlement cycle from two days (T+2) to one day (T+1), which is in line with international trends. ESMA has highlighted several hurdles, including the need for harmonization, standardization, and modernization of systems across the EU.

According to the regulator, the upgrade will require significant investments, and market participants are advocating for amendments to the Central Securities Depositories Regulation to ensure a smooth transition.

Transition to T+1

As global financial markets increasingly adopt the shorter cycle, the EU is taking steps to catch up. One of the central challenges facing the EU is ensuring that all stakeholders across sectors and regions are on the same page.

With the highly interconnected nature of European capital markets, a coordinated approach is essential. To achieve this, ESMA is working with the European Central Bank (ECB) and the Directorate-General for Financial Stability to lay the groundwork for a seamless transition to T+1.

Given the experience of other regions, close collaboration between regulators and market participants is crucial. Authorities are setting up a governance structure to oversee the technical preparations, ensuring that the process remains inclusive and represents all sectors and regions in the EU.

T+2 has been the standard for settling securities transactions for over a decade, meaning trades are settled two business days after execution . However, countries like the US, Canada, and Mexico have already adopted a T+1 standard, speeding up settlements to the next business day.

This has prompted the EU to assess its readiness for such a shift, aiming to remain competitive in the global financial landscape. The ESMA has been tasked with studying the potential impact of T+1 on EU markets. Preliminary findings suggest the move will reduce risk, lower costs, and align the EU with other major financial hubs.

Coordination Across Europe

Adopting T+1 would bring multiple benefits. It would lower the risk associated with unsettled transactions, potentially saving margin costs and reducing exposure to market volatility . However, implementing this change will require significantly modernizing the EU’s post-trade infrastructure.

Additionally, harmonizing the EU with other regions following the T+1 model could streamline cross-border transactions, reducing misalignment costs. Improving efficiency could also help strengthen the EU’s Savings and Investment Union, boosting economic resilience.

The EU is under pressure to avoid falling behind other global financial centers, particularly as more regions embrace T+1. Failure to act quickly could prolong the misalignment with major jurisdictions, potentially amplifying negative impacts on the European market.

About the Author: Jared Kirui
Jared Kirui
  • 1400 Articles
  • 19 Followers
About the Author: Jared Kirui
Jared is an experienced financial journalist passionate about all things forex and CFDs.
  • 1400 Articles
  • 19 Followers

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