(Bloomberg) -- The European Union’s markets regulator recommends the bloc shortens the time it takes to settle securities transactions from two days to one in late 2027, a move that would put the region back in step with the US.
The European Securities and Markets Authority is calling for a move to what’s known as T+1 on Oct. 11 2027, according to a statement published Monday. The US, Canada and others made the switch in late May, and the UK plans to shift in the final quarter of 2027.
European stocks and bonds currently settle at a lag versus US peers, a mismatch that is costly for some investors. While ESMA’s recommendations still need political approval, there are signs of growing consensus toward the need to shorten the settlement cycle, with the European Commission and European Central Bank co-signing a statement last month on the urgency of the transition.
“The impact of T+1 in terms of risk reduction, margin savings and the reduction of costs stemming from the misalignment with other major jurisdictions globally will represent important benefits for the EU capital markets,” ESMA said in the statement.
Misalignment between US and European markets is creating funding gaps for investors whose portfolios span multiple jurisdictions, as they might need to settle a purchase of securities before receiving the corresponding cash. A Citigroup Inc. poll published in September found 46% of buyside respondents were having to cover “significant” shortfalls during the settlement process between T+1 and T+2 regimes.
A coordinated transition between the EU and UK was requested by the European T+1 Industry Task Force, the group established last year to represent the finance sector during the transition. In the US, that shift saw financial institutions across the globe relocate staff, adjust shifts and overhaul work flows, and the transition has been largely smooth so far.
‘Overly Ambitious’
In Europe, the shift to T+1 could prove more complex and costly because, unlike the US, the region lacks a unified capital market. Some market participants have expressed concern that a late 2027 transition is “overly ambitious,” according to the taskforce.
There are 90 trading venues, 14 central counterparty clearing houses and 34 central securities depositories in the European Economic Area, according to ESMA. The regulator gave the example of a Dutch retail investor buying an Irish fund managed by a French asset manager from a small Italian bank to illustrate the complex chain of institutions involved in seemingly simple transactions.
“All actors of the financial system will need to work on harmonization, standardization, and modernization to improve settlement efficiency,” ESMA said. “This will require some level of investment.”
ESMA estimates it might take between €1.6 billion ($1.7 billion) and €5.3 billion for brokers and custodians to come up with the required changes to the transition. On the other hand, the switch will reduce the amount of collateral required to be posted to clearinghouses to cover the risk of trades, which should result in a 42% reduction in margin needs, or about €2.4 billion, broadly in line with the US experience.
ESMA’s transition date “aligns with the UK’s planned timeline and importantly lays the groundwork for a coordinated transition,” said Will Clamp-Gray, principal for capital markets and wholesale policy at UK Finance, which represents the financial services industry. “We’ve long called for a harmonized approach between the UK, the EU and Switzerland to minimize market fragmentation and maximize potential efficiency gains.”
(Updates with details from report from eighth paragraph.)
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