The European Securities and Markets Authority (ESMA)
aims to cut the time between trade execution and settlement by half by 2027.
ESMA has now put in place a plan to shift to the T+1 securities settlement from
the current T+2 settlement cycle.
This move seeks to enhance market efficiency, reduce
risks, and align the EU with global standards. The regulator believes this
shift will make the EU’s post-trade processes more efficient.
Faster Securities Settlement
ESMA’s latest report outlines the benefits of
transitioning to a T+1 settlement cycle, which would shorten the period between
trade execution and settlement from two days (T+2) to just one day (T+1).
The change aligns with broader goals to integrate EU
capital markets and support the Savings and Investment Union objectives. ESMA
recommends implementing the T+1 cycle on October 11, 2027.
This date reportedly avoids the logistical challenges
associated with transitioning during the busy November-December period and
steers clear of the first Monday of October, which often coincides with
end-of-quarter activities. ESMA highlighted the importance of a coordinated,
simultaneous shift across all relevant financial instruments to ensure a smooth
transition.
🔴 ESMA proposes to move to T+1 by October 2027 → https://t.co/pZhEY2lYsQ.#ESMA recommends the simultaneous migration to T+1 across all relevant instruments and suggests 11 October 2027 as the optimal date for the transition to T+1 in the EU. pic.twitter.com/Oq62HJGFLG
— ESMA – EU Securities Markets Regulator 🇪🇺 (@ESMAComms) November 18, 2024
The regulator also plans to align the EU’s move to T+1
with similar timelines in other European jurisdictions, minimizing cross-border
discrepancies and reducing operational risks. ESMA‘s report highlights the potential advantages of
moving to T+1, including reduced counterparty risks, lower margin requirements,
and cost savings from better alignment with global markets.
Costs and Benefits
Faster settlement reduces the time frame in which
trades can fail, thus minimizing risks and enhancing investor confidence.
However, the transition won’t come without its challenges. It reportedly
requires significant updates to the Central Securities Depositories Regulation and the settlement discipline framework.
Harmonization and standardization of processes will be
key to enhancing settlement efficiency. According to ESMA, this will likely
require investments in technology and infrastructure, pushing the financial
industry toward modernization.
Following the release of its final report, ESMA plans
to work closely with the European Commission and the European Central Bank to revise the existing rules on settlement efficiency.
This year, the US stock market transitioned to a T+1 securities settlement. The change applied to stocks, corporate and municipal bonds, ETFs, certain mutual funds, and other exchange-traded securities. The settlement mandates that a security bought or sold, for instance, on Monday, must be fully settled by the end of the day on Wednesday.
This article was written by Jared Kirui at www.financemagnates.com.
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