A move by Europe to a one-day settlement cycle (T+1) could offer significant advantages, but several obstacles must be addressed, according to a report from the Association for Financial Markets in Europe (Afme).
Currently, the settlement cycle for most transactions in Europe’s equities and fixed income markets is two business days. With the U.S. recently transitioning to T+1, Afme outlines the potential benefits and challenges of a similar change in Europe.
A shorter settlement cycle could decrease counterparty, market, and credit risk, lower costs, and help maintain global alignment. However, transitioning to T+1 would drastically reduce the time available for post-trade operations from 12 hours to just two. This shift may lead to an increase in settlement failures and complicate operations for global participants in various time zones.
Additionally, the change would affect securities lending by compressing the timeline for identifying and recalling securities, potentially causing disruptions in the process and resulting in more settlement failures and cash penalties.
Pete Tomlinson, director of post-trade at Afme, emphasizes the importance of thoroughly understanding and addressing the current model’s barriers to timely settlement before adopting T+1. He cautions that an uncoordinated approach could result in increased risks, costs, and inefficiencies, given the diversity of European markets with their varying infrastructures and legal frameworks.
To address these challenges, Afme is advocating for the establishment of an industry task force to conduct a comprehensive assessment of the benefits, costs, and challenges associated with T+1 adoption.
For further details, you can access the full report:
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