On 18 June, the European Parliament and the Council reached a political agreement amending the Central Securities Depositories Regulation. The agreement shortens the settlement cycle for transactions in transferrable securities traded on EU trading venues from two business days to one business day. The proposed date for this to happen is by 11 October 2027.
What exactly is settlement? It is the process through which the buyer of a security (e.g. a share or a bond) receives the security and the seller of that security receives the payment. And the period of time between the moment the trade takes place (known as the ‘trade date’, or simply ‘T’) and the settlement date for transferable securities traded on trading venues and settled in securities settlement system is commonly referred to as the settlement cycle. Under the agreement, the length of the settlement cycle will be shortened from the current ‘T+2’ to ‘T+1’. In practice this means that an investor buying/selling an EU share or bond on an EU trading venue on a Tuesday will receive that share or bond/cash by Wednesday close of business at the very latest.
The legislative text agreed by the Parliament and the Council is based on a Commission proposal adopted in February of this year. The latter was, in turn, based on the recommendations set out in a report prepared by the European Securities and Markets Authority (ESMA) and on the input gathered from EU public and private stakeholders. While the political agreement kept the main elements of the Commission’s proposal (the move to T+1 and the date by which this needs to happen), it deviated from that proposal in one important aspect, namely its scope.
Indeed, the Parliament and the Council agreed to exempt certain types of transactions from the scope of the T+1 requirement, namely securities financing transactions (‘SFTs’). SFTs include, among others, transactions that allow market participants to borrow cash against securities they own or transactions in which market participants borrow or lend securities. The exemption will allow market participants to benefit from the same flexibility – in terms of determining when an SFT will be settled – regardless of whether they are trading on a trading venue or outside a trading venue (in the so-called over-the-counter market).
Moving to a T+1 settlement cycle will improve the efficiency and resilience of EU capital markets. It will reduce counterparty risk – the risk that a party in a transaction will default and hence fail to deliver cash or securities as promised. It will also lower costs for market participants by reducing the need for margin requirements, which are collateral deposits that guarantee transactions during the settlement process. Additionally, the move to T+1 will encourage greater automation of settlement processes, making them more modern and efficient across the EU. Finally, moving to T+1 will remove the costs caused by differences in settlement cycles with other large markets that have already moved to T+1, like the US, Canada, India and China.
The agreed text provides the necessary legal certainty that will allow market participants and market infrastructures to work on the operational implementation of the T+1 requirement. In this context, one big first step was taken on 30 June with the publication of the EU T+1 Industry Committee High-Level Road Map. The public and private sectors will continue to pool efforts in order to ensure a smooth move to T+1.
Given the high level of interconnectedness between EU capital markets and the capital markets of the United Kingdom and Switzerland, the EU is coordinating its efforts with those jurisdictions to foster harmonisation and avoid unnecessary misalignment costs.
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