T+1 in Europe: what’s next for the EU and the UK?

T+1 in the European Union

ESMA’s long-awaited report on the shortening of the settlement cycle in the European Union was published on 18 November 2024.

It follows a joint statement by ESMA with the European Commission and the European Central Bank from 15 October 2024 setting the basis for a governance structure to accelerate the technical work needed to support a future move to T+1 in the EU. This governance will be incorporating the EU financial industry and should be, according to ESMA, inclusive and ensuring a balanced sectorial and geographical representation.

A legislative proposal by the European Commission to shorten the settlement cycle in the EU is expected as a next step. This will be followed by a discussion on the appropriate timing to be settled by the EU co-legislators.

ESMA’s T+1 report: a summary

The ESMA report on the shortening of the settlement cycle was commissioned by the EU co-legislators through CSDR Refit and gave a mandate to ESMA to assess 4 main aspects:

• An assessment of the appropriateness of shortening the settlement cycle in the EU and the potential impacts for market infrastructures and market participants
• The costs and benefits of shortening the settlement cycle in the EU
• An outline of how to move to T+1
• An overview of international developments on settlement cycles and their impact on the Union’s capital markets

While it has proven a difficult exercise to properly document all the aspects of the analysis, it is clear to ESMA that the settlement cycle should be shortened to the first business day after trades have been executed (i.e. from T+2 today to T+1) while a settlement cycle shorter than that (i.e. T+0) could only be envisaged in the longer term.

ESMA considers that a move to T+1 in the EU is a question of global competitivity. Even though the cost/benefit analysis may appear rather incomplete, ESMA is of the opinion that investors might consider EU capital markets somewhat unattractive if the EU chose to stay on a T+2 settlement cycle. The conclusion reached by ESMA seems to be drawn mainly on the benefits of international alignment with other major jurisdictions (especially the US).

Yet, challenges remain for accelerated settlement across the Union. ESMA points out several difficulties, with some being very specific to the EU context, which will have to be addressed in a timely manner if the proposed calendar is to be pursued.

T+1 in the EU: main challenges

The main challenges of moving to T+1 in the EU derive from:

• The need to automatise various processes along the custody chain (from trading to settlement) and the significant related investment needs
• The fragmented settlement landscape across the EU
• A potential increase of settlement fails

ESMA makes several recommendations throughout the report. Some should translate into regulatory requirements. Others will be expected to be taken upon directly by market participants to pursue a successful T+1 transition. Striking the right balance between defining regulatory requirements on the one hand and what needs to be managed at industry level on the other hand is a challenge.

Market participants might be expected to:

• Implement system upgrades
• Define market standards
• Define market practices
• Review schedules and functionalities offered by market infrastructures

While ESMA also makes some targeted recommendations for key post-trade processes (matching, settlement, etc.) or with respect to some specific financial instruments (ETFs, SFTs, etc.), the general idea coming from this report is that T+1 should be seen as an opportunity for further harmonisation and standardisation within the EU. This should promote market integration and ultimately, the Savings and Investments Union (SIU) objectives.

T+1 in the EU: timeline

ESMA proposes to move to T+1 in the European Union on 11 October 2027 and identifies 3 phases for the transition:

• A planning phase with the finalisation of technical solutions by the industry to be completed by Q3 2025
• A development phase for industry implementation to be completed by Q4 2026
• A testing phase over 2027 until the transition date

The next steps will include a legislative proposal by the EC to be discussed by the EU co-legislators. In the meantime, ESMA will continue working on the governance, trying to bring EU regulators and the industry together to tackle the various technical challenges to guarantee a successful transition to T+1.

T+1 in the UK

For the latest update on the move to T+1 in the UK, read our Global outlook article.