Earlier this month marked the thrilling end to the European Football Championships as Spain defeated England in a final played in Berlin, Germany. On the same day, in Miami Florida, Argentina defeated Colombia in extra time to win the Copa America. While Spain’s win was the talk of Europe, the Copa final garnered some attention in the States but not to the levels of other U.S. centric sporting occasions such as baseball or American football. The majority of Americans who hear the word football intuitively think of American football and not soccer.

There are some minor similarities between soccer and American football - both are team sports, both are ball sports. However, there’s also many differences and this analogy comes to mind when I think about the construct of the European and U.S. securities markets.

At its heart the acceleration of securities settlement cycles in Europe will be similar in terms of broad risks, required changes, and benefits once successfully completed. Though it’s not as straight forward as the North American project for several nuanced reasons. This is why industry deems the current proposed implementation date for E.U. T+1 of 2027 appropriate.

The U.K. has already appointed an Accelerated Settlement Taskforce and published a report recommending the transition to T+1 settlement for all securities trading on U.K. trading venues. The European Securities and Markets Authority (ESMA) has also consulted on T+1, held broad based industry discussions using feedback from their previous Call for Evidence and plans to produce its report on the E.U. transition in Q3 2024 which will likely confirm the implementation timelines.

Europe’s Uneven Pitch

Europe T+1 is achievable and should benefit everyone globally as the cycle becomes market standard across the board. However, everyone should be aware there are certain aspects that make Europe a more complex transition than the North American shift due to the composition of its current market structures.

The drivers of an accelerated settlement cycle in Europe are the same as the U.S.:

• Reduced counterparty risk
• Increased liquidity
• Alignment with U.S. market
• Drive process automation and market best practices
• Increase capital efficiency via less clearing margin requirements

However, fragmentation, regulation, and national level nuances will require further considerations within Europe that were not present in the North American project. These should be addressed to match the success that was achieved in the U.S. T+1 changeover.

Let’s break down three of these:

    1. Complex Ecosystem

The unique and fragmented nature of the European markets are often not fully appreciated by those not directly involved. However, they say a picture speaks a thousand words and the table below illustrates a complex European trading landscape.

The U.S. transition was critical owing to the markets’ size and trade volumes and much can be drawn on for Europe’s shift, however Europe unquestionably has more multifaceted concerns than the U.S. project.

Europe’s Trading Markets

Source: AFME

There are also a myriad of operational considerations in Europe that don’t exist elsewhere. These include securities held across multiple central securities depositaries (CSDs), dual listed securities operating on both European and non-European exchanges, misalignment of CSD batch processing cycles, and some markets who operate continuous settlements but with different deadlines.

Not all 31 European CSDs have the same operating hours, some allow partial settlements and others do not, some CSDs are part of the T2S, and others are not. Detail of European fragmentation becomes more evident the deeper you dive into the technical details of European securities markets.

There are also certain securities, such as Eurobonds and exchange traded fund (ETF) shares which might trade on numerous European trading exchanges, including the non-E.U. exchanges of the U.K. and Switzerland and certain Nordic venues. These might also settle at an International Central Securities Depositary (ICSD). This activity shows how the E.U., EEA, U.K., and Switzerland remain highly interconnected and why harmonised settlement cycles remain important for all parties.

    2. Regulatory Complexity – CSDR

As always in Europe, regulation looms large and T+1 is both more complex and financially risky for traders under Central Securities Depositary Regulation (CSDR). The regulation contains mandatory buy-ins¹ and cash penalties contained for failing trades.

While Europe is already into consultation about a CSDR Refit to make the regulation more pragmatic, CSDR’s trade fail components weigh heavily on accelerated settlement. CSDR’s mandatory buy-in rules have been postponed until November 2025, owing to concerns about impacts on market liquidity, the cost of the regime for market participants, and the readiness of CSDs. The added complexity of T+1 exacerbates these issues for European securities market competitiveness. The U.K. chose not to implement CSDR but continues to assess its approach to settlement discipline. However, CSDR still applies to the U.K. and U.S. counterparties clearing through a European CCP. The Refit discussion should be closely watched as it is highly interconnected to Europe T+1.

Since the adoption of CSDR, market players across Europe have already invested heavily in systems and processes allowing them to comply with all the settlement discipline requirements of CSDR and the T+2 mandated cycle. More work is needed to recalibrate their models including removing manual processes.

    3. Global Participants

We previously flagged that U.S. T+1 was a global issue and not merely a U.S. issue, that it was an end-to-end process issue not a mere post-trade settlement issue. That equally applies to Europe T+1. With the heterogeneity of the markets and the volume of global investors not from the continent who regularly trade in Europe, synchronisation of the accelerated settlement will be a whole lot trickier than the North American project.

Cash: Cash is challenging in situations where FX is required, especially for less liquid currencies. This is because most FX remains on a T+2 cycle and misalignment and trade time compression increases the degree of difficulty for investors in different time zones.

UCITS: Funds are distributed and traded daily across the globe. It is estimated that c.36% of UCITS investors reside outside of Europe - not an insignificant cohort. T+2 is considered the optimal settlement cycle for globally distributed UCITS funds since the 48-hour window allows for the trade lifecycle to be completed inclusive of matching, confirmations, FX legs and NAV calculations, and investor contract notes. Many UCITS retained a T+2 fund settlement cycle through the U.S. T+1 change.

European securities and investment funds: Trading tends to have longer intermediary chains than other markets also – as with U.S. T+1 your operational flow is only as strong as the weakest link in your chain.

To conclude, while Europe trains for T+1, it faces a more uneven pitch than what the U.S. plays on. However, industry should focus on the goal, and not be caught offside and pay the penalty. Rather, it should quarterback the project and ensure a successful touchdown of Europe T+1 as the acceleration of global settlements goes global.

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[1] (Buy-ins occur when a counterparty must re-purchase a security that was not delivered by the other counterparty by the settlement date, which, due to the price volatility, could lead to higher cost)