The complexity of Europe
Nearly 10 years have passed since 6th October 2014, when T+2 settlement went live. Much has changed over that time. With Brexit having altered the geo-political landscape, there is now something of a competition between UK and European market centres. Against this backdrop, the US has taken the lead in this next marketplace evolution.
The key aims of US T+1 settlement are three-fold:
- more efficient trading for U.S. market participants
- increased liquidity and
- reduced market risk.
It is expected that the UK and Europe will follow suit with the new settlement cycle likely 12 months after the US. But the truth is that Europe and the UK have a significantly more complex market infrastructure. The transition is a heavier burden on this side of the Atlantic, with 14 currencies, 18 CCPs, 31CSDs and 25 Exchanges. Massive changes to the current post-trading operating models will be needed. To assess this, AFME has established a task force, whose initial report is expected by the end of 2023.However, regardless of when Europe and the UK adopt this change, the US T+1 move will have an immediate impact on every market participant trading in US securities. Indeed, many of the large European and UK firms have already started working to re-engineer their operating models. This effort has benefited greatly from the ground work done for CSDR (Central Securities Depository Regulation). Depending on the firm, there are various states of preparation now beginning to be implemented.
However, it is the buy-side firms which are expected to struggle the most with accommodating a faster settlement cycle. Many of the buy-side firms face unique challenges adapting their critical internal infrastructure by changing multiple systems simultaneously. This includes upgrading their trading and settlement processes; implementing a “follow the sun” model; aligning more closely with their custodians and ensuring real time communication internally. With less time in the entire process now, that last piece becomes the most important component.
As pressure mounts, some market players have criticised the regulators for a lack of clarity in all this. Many companies feel they are scrambling to understand what exactly is needed for them to safely meet the May 2024 go-live date. As such, Securities Services and custodians have been stepping in and educating their clients on the potential impact the US T+1 may have on their business. They are helping to provide the steps needed for firms to become compliant with the shorter cycle.