EU Announces Next Steps for the Transition to T+1 Settlement

The European Commission, the European Central Bank and the European Securities and Markets Authority have published a joint statement on the next steps to support the preparations towards a transition to T+1. Under the EU Central Securities Depositories Regulation, ESMA is required to assess the appropriateness of shortening the settlement cycle in the EU and to propose a detailed roadmap towards a shorter settlement. ESMA plans to deliver its report to the Council of the European Union and the European Parliament in the coming months.

Its preliminary findings are as follows:

• Shortening the settlement cycle in the EU will change the way in which markets function, with impacts depending on the type of stakeholder, the category of transaction and the type of financial instrument.
• Quantifying some of the costs and benefits related to the shortening of the settlement cycle in the EU is challenging, but the elements assessed by ESMA to date suggest that the impacts of T+1 in terms of risk reduction, margin savings and the reduction of costs linked to the misalignment with other major jurisdictions globally, bring along important benefits for the EU Savings and Investments Union.
• Harmonization, standardization and modernization will be needed and will require investments. The improved efficiency and resilience of post-trade processes that would be prompted by a potential move to T+1 would facilitate achieving the objective of further promoting settlement efficiency in the EU.

Although settling securities transactions on T+1 in EU CSDs is already technically and legally possible, EU market participants have indicated a strong preference for amending the CSDR to mandate a harmonized shortening of the settlement cycle in the EU. In their view, this would ensure a coordinated and smooth transition to T+1 and provide legal certainty. ESMA explains that a decision on this matter needs to be taken by the EU co-legislators following a legislative proposal from the European Commission, should the latter decide to adopt one.

In addition, ESMA, in close coordination with national competent authorities, the European Commission and the ECB, has agreed to establish a governance structure, incorporating the EU financial industry, as soon as possible to oversee and support the technical preparations of any future move to T+1. Details of the governance structure are expected soon.

The U.K. is on track to move to T+1 by the end of 2027 by the latest. The U.K. has stated that it would move at the same time as the EU and /or Switzerland if a date can be agreed. The recent interim recommendations from the Accelerated Settlement Taskforce Technical Group present two options on the scope of instruments to be in scope when the U.K. does move, which are dependent on whether the EU and Switzerland move at the same time. The final recommendations from the U.K.'s Accelerated Settlement Taskforce Technical Group are expected by the end of 2024.

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