Shortening the settlement cycle: Why Europe should not wait too long to introduce T + 1

Abstract

The amount of time required for the settlement of securities is a long-running issue for European capital markets. Twenty years ago, the Giovannini Group looked at the large number of securities settlement systems that existed in Europe (and still do). In 2014, based on the Group's proposals for improving the settlement cycle, the EU moved from T + 3 (trade date plus three business days) to T + 2 (trade date plus two business days), with the US following a few years later in 2017. The US is now ready to shorten its settlement cycle further to T + 1 by March 2024. Although there are benefits from such a move (eg capital and liquidity efficiencies, lower margin requirements, risk reduction, increase scale and speed of processing, lower costs, investor protection), there are also challenges (eg cross-border transactions, securities lending market, operational challenges). This paper discusses what Europe would do. Will it follow the US or not? And if yes, when? Before answering these questions, the EU should: i) address the significant problems caused by the diversity and fragmentation of the EU's capital markets and market infrastructures, ii) collect views from all different stakeholders (eg central securities depositories, buy and sell side, regulators, central counterparty clearing houses and other types of market infrastructure) and iii) conduct a feasibility study on a move from T + 2 to T + 1. Given that such an endeavour will take time, the EU should kick off the discussion immediately.