At a glance
- The question is not if but when EU moves to T+1
- EU must make a co-ordinated move with the UK and Switzerland to succeed
- T+1 must not distract efforts to create a capital markets union
The US will not delay the move to T+1 and other markets must be ready by Memorial Day, Gary Gensler has said.
The Securities and Exchange Commission (SEC) chairman addressed delegates in a keynote speech at a roundtable hosted by the European Commission (EC) today (25 January).
Mr Gensler’s comments add to the pressure on UK, Swiss and EU policy-makers to clarify their position on when they move to T+1.
He said: “You [in Europe] should be ready to shorten any trade plumbing by Memorial Day weekend. Time is money and shortening the [settlement] cycle increases efficiency, minimises risk and also reduces the amount of margin that you need to leave with the clearing house.
“I don’t underestimate the challenges. In the EU you have 14 clearing houses and no sovereign debt markets akin to the US. But I think the benefits of moving to a T+1 outweigh the disadvantages.”
Mr Gensler added once North America moves to T+1 it will be aligned with India, Israel and many parts of Asia that have the same regime. That will mean half of the world’s capital markets will settle on T+1. The US accounts for 40% of capital markets worldwide.
EU Commissioner for Financial Stability, Financial Services and Capital Markets Union Mairead McGuinness also spoke at the roundtable.
“We need to move from talking about things to doing things [in Europe],” she said.
The big picture view of the day was that a successful transition to T+1 could lead to increased safety, reduce risk and foster better international markets. But the transition comes with risks such as the potential for capital to be diverted away from more productive investment.
Oncoming train
Outside of the keynote speakers, three panels considered various aspects of T+1 for the EU. The first considered the opportunities that a shorter settlement cycle could bring, such as the chance to look at trade processes differently. And what assets are more likely to benefit from a move to a shorter cycle compared to ones that would not.
Susan Yavari gave a view from the European fund management industry and warned the challenges should not be underestimated.
Ms Yavari, a senior regulatory policy advisor at the European Fund and Asset Management Association, said: “The US move feels like a very fast train hurling down the tracks and now T+1 is taking up to 80% of my time. It could create significant friction in managing a portfolio because asset managers in the EU have 25% of their equities in Europe and 43% in the US. So there is exposure there.”
Any misalignment due to T+1 could cause friction on both the buy- and sell-side of a trade. That covers funding costs, liquidity constraints, foreign exchange (FX) costs and other asset trade costs.
The European Securities and Markets Authority (Esma) called for evidence on T+1, the consultation for which closed in December last year.
Carsten Ostermann, head of market and digital innovation at Esma, sat on the first panel. “We have received very mixed feedback to our consultation. The move should not come at the expense of settlement efficiency,” he said.
“We hope to release our report [on T+1 migration] at the end of this year. We want to look at how T+1 has worked in North America and include that experience in our report.”
One panellist — Adam Farkas, CEO of the Association for Financial Markets in Europe — said that more liquid asset classes would find it easier to move to T+1. But the difficulty would be migrating less liquid assets that are harder to settle.
Stephan Leithner, member of the board, Deutsche Börse Group, meanwhile, said that from his point of view the exchange can technically settle on T+1. And Europe has much fewer settlement failures compared to other markets such as the US.
Yet, he worried that a focus on T+1 could stop other important developments to the capital markets union (CMU).
“It is important that the other aspects of CMU are not sacrificed due to T+1. We also need to co-ordinate with the UK and Swiss, otherwise the move to T+1 will be much more complicated,” Mr Leithner said.
Global dimension
A second panel assessed the international dimension of shifting to a shorter settlement cycle. Sachin Mohindra, executive director at Goldman Sachs, argued that Europe should look at the “golden standard of trades” to reduce operational risks that arise.
Andrew Douglas, deputy chair of the UK Task Force on accelerated settlement, said that there needs to be communication, co-ordination and compromise for T+1 to work across markets.
“We won’t get anywhere unless people are prepared to compromise. It will be painful for everyone to a degree,” he said. “The reason why you get contrasting points of view is that different companies are in various points of the settlement journey.”
Euroclear CEO Lieve Mostrey urged there to be end-to-end collaboration across currencies and time zones for success.
“One thing that will never change is time zones that will continue to exist even in the DLT [distributed ledger technology] world. We should try to do a risk assessment of T+1 from an end-user perspective so we don’t lose investors from outside Europe.”
FX trading was flagged as a particularly sensitive challenge in the context of T+1. “Under the new regime there are only two hours in which to settle an FX trade if you are an investor outside the US,” said Marc Bayle de Jessé, CEO of the global clearinghouse CLS.
He added: “What lesson I took from the US is everyone needs to be onboard otherwise there will be trade friction. We will wait to see the effect of T+1 and there could be new settlement and service windows to settle FX.”
2027 hope
The final panel discussed how to organise a smooth transition to a shorter settlement cycle in the EU.
Here, panellists suggested that 2027 could be a realistic date for when the bloc can move to T+1. That was also the majority result in a vote among delegates.
Pierre Davoust, head of CSDs at Euronext, said: “We should go for a double big bang approach in asset classes and countries at the same time. The condition for this to work is we go quite fast and we define what is good for us within the EU. And we align with the UK and Switzerland on what the right date to migrate is.”
Rafael Plata, secretary general of the European Association of CCP Clearing Houses (Each) also called for guidance from policy-makers. Each is the trade organisation that represents the interests of European counterparty clearing houses.
Mr Plata said: “We need the authorities to tell us what they want us to do, how and in what timeframe. Chairman Gensler talked about regulators in the US giving T+1 guidance in early 2023 to prepare. We need something similar. I suspect we might move in 2027.”
