T+1 Settlement

T+1 – Shortening the settlement cycle (again?)

The European Securities and Markets Authority (ESMA) has launched a call on evidence to evaluate the costs and benefits of shortening the settlement cycle to T+1 (including T+0) in the EU. 

In 2014, the Central Securities Depositories Regulation (CSDR) introduced the T+2 settlement cycle for European harmonization and to limit the risk on cross-border settlements. Market participants might still remember the done effort.

With the recent settlement cycle adaption to T+1 in the United States and Canada, which will come into effect in May 2024, the EU wants to evaluate the impact as well as a potential own adaption. China and India are already operating on shortened cycles. Other jurisdictions such as the UK or Switzerland are also analysing to shortening cycle. The main drivers behind the shortening of the settlement cycles include risk awareness, financial markets, and technological innovation. A selection of the identified obstacles include process compression of post-trade activities within a shorter time window, coordination of different entities, global alignment with different time zones and FX markets, potential asset class or product dependencies, and compliance risks.

Yet, shortening the settlement cycle to T+1 is expected to limit counterparty and settlement risks, reduce collateral requirements, and therefore might lead to increased liquidity.

Find out, how our Operation & Settlement Experts at LPA can help with you the T+1 initiative.