The transition to T+1 settlement is gaining traction globally and the focus shifted to Europe after successful transition to T+1 settlement in US, Canada, and few other countries in May 2024. UK, European Union (EU) and Switzerland announced plans to move
to T+1 settlement simultaneously on October 11, 2027 and a harmonized transition in these interconnected markets eliminates the risk of misalignment of settlement cycle and misalignment costs. The benefits of the move to T+1 settlement include reduced counterparty
and systemic risk, decline in margin requirement, and improved operational efficiency. Post T+1 implementation in US, the benefits realized include 23% decrease in NSCC clearing fund, and nearly 95% of affirmations rate by 9PM ET cutoff on trade date.
Successful transition to T+1 settlement in US
In major markets, the US had taken the lead to shorten settlement cycle from T+2 to T+1. DTCC, industry associations and market participants collaborated closely for over 2 years, which culminated in a smooth transition to T+1 settlement. Few of the best
practices, which helped in a seamless transition include setting and sticking to a firm implementation date, focusing on industry outreach and engagement, publishing T+1 implementation playbook, establishing industry working groups to find solutions to pressing
challenges, and extensive industry testing.
Challenges in T+1 settlement
The main challenge is a shortened timeline for post trade processing in a T+1 environment. Allocations and confirmations must be completed on the trade date, and settlement instructions must be submitted to the central security depository (CSD) before cutoff
for timely pre-settlement matching and settlement. A drastically compressed timeline for post trade processing leaves very short time for exception management and a potential surge in settlement fails.
T+1 settlement in UK
The accelerated settlement taskforce technical group published the UK T+1 implementation plan, which covers the scope of regulatory changes needed to facilitate the transition to T+1 in UK, and the UK T+1 code of conduct (UK-TCC).
The UK-TCC identified 12 critical actions and 26 highly recommended actions across six business areas for implementation by market participants to enable a smooth transition to T+1 settlement. The business areas impacted include settlement, financial market
infrastructures (FMIs), static data, corporate actions, securities financing transactions, and foreign exchange (FX). The UK-TCC recommended implementation of a few key critical actions no later than December 31,2026 to capitalize immediately on the benefits
of moving to T+1. Key recommendations include
- Complete allocation and confirmation processing before 23:59 UK time on T.
- Submit settlement instructions to the CSD before 5:59 UK time on T+1.
- Implementation of financial markets standard board’s (FMSB) standard for sharing of SSIs
- Implementation of settlement efficiency improvement measures such as auto partial, auto shaping, and hold & release.
T+1 settlement in EU
Moving to T+1 settlement in EU would be more challenging considering the complex and fragmented EU securities markets with multitude of currencies and financial market infrastructures. The EU specific challenges include market inconsistencies, extended trading
hours, and batch-based matching and settlement in a few markets. The EU T+1 industry committee published a series of recommendations for market participants in transition to T+1 settlement in EU. Key recommendations include
- Complete allocation and confirmation processing before 23:00 CET on T.
- Submit settlement instructions to the CSD before 23:59 CET on T.
- Central counter parties (CCPs) to include trades received until 22:00 CET on T into the netting and submit the settlement instructions to agent/CSD before 22:30 CET on T.
- Establish a harmonized DvP cutoff of 16:00 CET for settlement in EUR and non-EUR European currencies, and FoP cutoff of 18:00 CET.
- CSDs to ensure securities settlement systems open for settlement at the latest by 00:00 CET on T+1. The first batch settlement in TARGET2-Securities (T2S) should run at 00:00 CET and the next batch settlement at 02:00 CET.
- Implementation of settlement efficiency improvement measures such as auto partial, auto shaping, hold & release, partial settlement, inclusion of partial settlement in first cycle of T2S night-time cycle (NTS), POA functionality for CCPs, auto borrowing
facilities, and maximizing bilateral and multilateral netting.
T+1 settlement in Switzerland
The swissSPTC Taskforce T+1 (TF T+1) is established to drive the transition to T+1 settlement in Switzerland and Liechtenstein. TF T+1 established workstreams to determine requirements and/or recommendations for successful transition to T+1 and develop an
implementation roadmap. The swissSPTC likely to publish recommendations for T+1 transition by Q3, 2025.
Impact on market participants
Moving to T+1 settlement will have a substantial impact on diverse market participants including broker-dealers, custodians, and buy-side firms. Firms saddled with manual processes, batch processing, and low straight-through-processing (STP) rate in post
trade will have significant challenges to meet the market deadlines in a T+1 environment and incur higher costs with potential increase in settlement fails. Transition to T+1 settlement require significant changes to post trade systems and operational processes,
and firms need to focus on automation of manual processes, leveraging industry utilities, shift to real-time processing across post trade, automation of securities lending recalls and corporate actions claims, and implementation of FMSB standard for sharing
SSI, implementation of best practices like auto partial, auto shaping, and hold and release, which are already offered by majority of CSDs in Europe.
Impact on market infrastructure firms
Transition to T+1 settlement will have a profound impact on market infrastructure firms, especially clearing houses and CSDs. With a heavily compressed timeline for post trade processing in a T+1 environment, the existing operational timetable needs to be
diligently assessed and make the necessary changes to the daily schedules to ensure no material degradation in the high STP rate, and settlement efficiency.
Clearing houses acting as CCPs will have a very short window in markets with late trading hours for completion of end of day processes like netting, reports generation, and transmission of settlement instructions. CCPs must assess and optimize end of day
processes for timely delivery of reports to clearing members and settlement instructions to settlement agent or CSD by 22:30 CET for settlement in T2S NTS.
CSDs need to enhance their platform to extend the instruction input and settlement cutoff, and offer key functionalities like auto partial, auto shaping, hold and release functionality if not offered currently. In EU, CSDs need to review and revise the overnight
batch schedule to ensure securities settlement system open for settlement by 00:00 on T+1. CSDs in EU need to implement additional enhancements to offer partial settlement and partial release, POA functionality, and allegement reporting.
Additionally, market infrastructures need to define industry testing strategy and drive industry testing for a smooth transition to T+1.
Conclusion
With a confirmed transition date and regulatory certainty for transition to T+1 settlement in EU, UK and Switzerland, the industry readiness for T+1 takes center stage now. Transition to T+1 settlement will necessitate behavioral, technological, and operational
changes among all market participants. It is imperative for firms to kick start transition to T+1 settlement program by establishing a core cross-functional team, begin the operations and technology impact assessment followed by implementation of necessary
changes over next couple of years.
