T+1 Settlement Transition: A Transatlantic Perspective

As the May 28, 2024 deadline for the US, Canada, and Mexico’s shift to T+1 settlement rapidly approaches, the financial markets are poised for a significant change. This move, which promises quicker trade settlements, marks a notable divergence in operational timing compared to the UK and EU markets, potentially heralding a transatlantic rift in securities trading.

The US Leads, Europe Contemplates The US’s decision to move towards a T+1 settlement cycle — where trades are settled one business day after the transaction date — is a strategic move to enhance market efficiency. However, this shift has placed the EU and UK in a position of playing catch-up. The European Securities and Markets Authority (ESMA) is actively engaging in this conversation, as evidenced by the roundtable discussion featuring SEC Chairman Gary Gensler as the keynote speaker.

Industry Perspectives on T+1 Responses to ESMA’s call for evidence on T+1 reveal diverse perspectives from major trade organizations like the Investment Company Institute (ICI), the Association for Financial Markets in Europe (Afme), and the International Capital Market Association (Icma). These organizations offer insights into how T+1 is perceived across different geographical and institutional contexts.

View from the US: A Call for EU Alignment The ICI, representing US regulated investment funds, urges EU authorities to commit to T+1 settlement within an early 2024 timeframe. This alignment is considered crucial for minimizing market misalignment and ensuring a globally coordinated approach. The benefits, as highlighted by ICI, include improved cash and liquidity management and more efficient trade settlement for both retail and institutional investors.

European Caution: Learning from the US Conversely, Icma advocates a more cautious approach. It suggests that the EU and UK should first observe the outcomes of the US’s T+1 migration before making any significant changes. Icma’s stance reflects a desire to avoid costly mistakes and ensure a well-planned and successful transition.

Historical Precedents and Future Implications Interestingly, this isn’t the first time such a settlement gap has occurred. The EU moved from T+3 to T+2 in 2014, three years before the US made a similar shift, without causing major market disruptions. This historical context provides a reassuring backdrop to the current situation.

Afme, acknowledging the complexities of such a transition, warns against a phased approach, citing the potential for increased settlement failures and operational costs.

The Road Ahead for EU and UK Policymakers With the deadline looming, EU and UK policymakers face a time-sensitive decision. The choice they make will have lasting implications on market efficiency, cross-border trading, and alignment with global settlement practices.

Loffa Interactive Group: Preparing for Change At Loffa Interactive Group, we understand the importance of staying ahead in this evolving landscape. Our technologies and strategies are designed to adapt swiftly to changes in settlement cycles, ensuring seamless transitions for our clients. Whether it’s T+1 or maintaining current systems, we are committed to providing solutions that align with global market trends and regulatory developments.

In conclusion, the shift to T+1 settlement represents a significant milestone in the financial world, underscoring the need for global coordination and careful planning. As the industry navigates these changes, Loffa Interactive Group remains a steadfast partner, dedicated to supporting our clients through these transitions.