Proposed Path for a Successful T+1 Transition in Europe
By Val Wotton, Managing Director and General Manager, DTCC Institutional Trade Processing
This article was originally published in Views The EUROFI Magazine (September 2024).
In May, the US was joined by Canada, Mexico, Argentina, and Jamaica in a successful move to T+1. In the US, the move to a shortened settlement cycle has driven reductions in risk and clearing fund requirements as well as greater operational efficiencies. At the same time, trade fail rates have remained stable despite some initial concerns that they might rise sharply.
Across the Atlantic, the UK and the EU are in the early stages of T+1 planning. There are several factors in these jurisdictions that will need to be considered when preparing for a T+1 transition. In particular, the EU has added complexity due to the different tax and legal systems across the 27 countries as well as a high number of stakeholders in different jurisdictions, including around 30 CSDs. There are, however, lessons that can be learned from the successful US transition that can support Europe’s preparation for T+1.
Related: The Market Infrastructure of the Future
First, industry collaboration is crucial to a successful transition to T+1. In the U.S., DTCC worked with SIFMA, ICI and the T1 Industry Working Group to outline key steps required for the shift and communicated those changes to the industry via educational materials such as the T+1 Playbook, T+1 Test Approach and T+1 Documentation. These types of initiatives are critical to ensure a smooth transition to T+1, and should be supported by ongoing engagement with, and education for, the industry. The UK and the EU are making some headway in this area and have established industry taskforces to coordinate preparations, with the UK on track to finalize its industry action plan by year end.
Second, efficient post-trade processes and automation are vital to achieving accelerated settlement. Trade-level matching is a critical part of the post-trade lifecycle that allows counterparties to identify exceptions that may cause the transaction to fail. By completing the allocation, confirmation, and trade matching processes on trade date, firms can increase the time available to address errors, thereby reducing the risk of settlement fails.
There are, however, lessons that can be learned from the successful US transition that can support Europe’s preparation for T+1.
A crucial part of the US success was that, in the final T+1 rules, the Securities and Exchange Commission (SEC), included new requirements around same-day affirmation practices for broker-dealers to help ensure timely settlement. Similarly, we strongly recommend that the UK and EU markets consider mandating that trade confirmation, allocation, and matching take place on trade date. A mandate will provide regulatory certainty to the industry and encourage market participants to make the necessary investments to automate manual processes, increasing operational efficiency and resiliency.
Related: U.S. T+1 Is Here — What’s Next?
In the EU in particular, investment in straight-through processing must be a priority since there are more intermediaries and messages in the settlement process than in the US. Industry and regulatory bodies in the EU should also consider mandating these same-day processes ahead of T+1 implementation to ensure preparedness.
The benefits of automation are not limited to matching and confirmation, they also apply to standing settlement instructions (SSIs). The prevalence of manual SSIs and the absence of storing and sharing SSI data in a standardized, automated way remains an issue. Inaccurate or incomplete SSIs are one of the primary reasons for settlement fails, and with a shorter settlement cycle where there is less time to resolve fails, it is critical the industry moves away from manual processes. The EU and UK markets would also benefit from further standardization by using Unique Transaction Identifiers (UTIs) to increase visibility into a transaction’s movement throughout the trade lifecycle, ensuring greater settlement efficiency. The good news is that both automated trade matching solutions which generate UTIs and SSI golden source databases are already available to be leveraged by market participants today.
The fourth important factor is global coordination. With globally interconnected markets, the risk of misaligned settlement cycles could affect end investors. While there is now an increasing consensus on the need for close coordination and alignment between the EU, UK, and Switzerland, it will be important for this to extend to other jurisdictions including Asia.
A mandate will provide regulatory certainty to the industry and encourage market participants to make the necessary investments to automate manual processes, increasing operational efficiency and resiliency.
Overall, post-trade automation and standardization are critical to settlement efficiency, and they pave the way for T+1 settlement. By leveraging greater levels of automation, collaborating and coordinating across the industry and jurisdictions, firms will be best prepared for an accelerated settlement cycle. Doing so will not only decrease risks and costs, it will also help to increase the competitiveness and the attractiveness of financial markets, which are goals pursued by the Capital Markets Union (CMU).
At DTCC, we are actively participating in industry T+1 Taskforces with our peers globally and will continue to leverage the lessons we have learned in North America to help guide global markets in their own journeys to shortened settlement. The time to start preparing is now.
