Contributing Firms:
The Settlement Cycle
ESMA has released a call for evidence on the shortening of the settlement cycle. The EU’s settlement cycle was harmonised in 2014 through the Central Securities Depository Regulation (CSDR) creating an EU-wide T+2 settlement requirement. What would be the challenges/costs to shorten the settlement cycle in the EU and, in your opinion would they outweigh the benefits of a move to T+1 (or T+0)?

Lisa Kealy, Partner, EY: ESMA released a consultation on the potential impact of shortening the standard settlement cycle in Europe in October, with comments due for submission on 15th of December. This is largely on the back of the US moving to T+1 settlement in 2023.
Lisa Kealy
Lisa Kealy

The US is a much simpler market than Europe, with 3 exchanges and one currency, whereas Europe has a more complex landscape with over 30 stock exchanges and numerous currencies. Furthermore, the US is one single market, whereas Europe has various exchanges across the EU but also in the UK and Switzerland which are integral pieces of the European financial market, but operate under different regulatory regimes, which should move in lockstep.

Managers haven’t seen investors calling for this, as those with immediate liquidity needs would typically use cash and money market instruments first, which would have a quicker settlement cycle than equities and exchange traded funds. However, as with any improvement or evolution, as investors get familiar with this in the US, it would follow that they will expect T+1 settlement in Europe as well.

In the current timeframe, the market is used to time needed for outages/ conversions/queries on trades. If the time for this is shortened, this should link through to seeing higher costs associated with trading. However, the introduction of this could drive innovations in the market, and drive automated solutions, which would naturally decrease these delays to trades.