Transition to T plus 1 settlement in UK, EU, and other markets – Implications for the industry

Globally most of the markets operate in T+2 settlement cycle and transition to T+1 settlement is gaining momentum across different geographies. Benefits of the move to T+1 settlement include reduced systemic risk, decline in margin requirement and improved operational efficiency.  

India moved to T+1 in phases and completed transition in January 2023. US moved to T+1 settlement on May 28,2024 and other markets Canada, Mexico, Argentina and Jamaica moved to T+1 settlement on May 27, 2024. The transition was smooth without any major issues in these markets. Chile, Colombia, and Peru announced plans to move to T+1 in Q2, 2025. UK plans to move to T+1 no later than 2027 and go live date will be finalized in 2025.

ESMA published summary of the feedback from market participants on the shortening of settlement cycle in EU in March 2024 and intends to submit final assessment before January 2025. In Australia, Australian securities exchange (ASX) released an industry white paper on the potential move to T+1 settlement and targeting a decision on T+1 transition by November 2024. Switzerland had not yet announced any plan on move to T+1 settlement. Industry prefers a coordinated transition to T+1 in EU, UK and Switzerland to avoid the risk of misalignment of settlement cycles between these interconnected markets.

Transition to T+1 settlement in US

In major markets, US had taken lead to shorten settlement cycle from T+2 to T+1. DTCC, industry associations and market participants collaborated closely and invested substantial effort 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. Industry is realizing the benefits of a shortened settlement cycle with increased affirmation rates, improved operational efficiency and reduced margin requirements.

Automation had been a key focus area for market participants with compressed timeline for post-trade processing and affirmation cutoff of 9PM ET on trade date. Market participants implemented technology solutions for automation like Match to Instruct (M2i) for auto affirmation and workflow tools for exception management.

Challenges in T+1 settlement

The main challenge is post-trade processing of institutional trades in a shortened timeline in a T+1 environment. Allocation, confirmation and affirmation equivalent pre-settlement matching in CSDs must be complete on the trade date. Institutional client sends allocations to executing broker, who sends confirmation back for each allocation to the client. Post confirmation, client sends the instructions to their custodian or prime broker, who in turn sends the settlement instruction to CSD.  Similarly, the broker sends the settlement instruction to CSD or their custodian. CSD attempts to match both instructions and reports any mismatches to the participants. Most common mismatches are discrepancies in trade financials like security quantity, settlement amount, etc. and standard settlement instructions (SSIs).

T+1 settlement in UK

T+1 task force recommended moving to T+1 settlement no later than 2027 and UK government had set up technology group (TG) to finalize the go live date and recommend solutions to the industry challenges. TG must determine transition date considering misalignment challenges with EU with a sooner transition and cost of divergence from US with a later transition. TG will identify and suggest solutions for the technical and operational challenges of transition, and select a date to mandate implementation of operational changes in advance of move to T+1 to increase automation and subsequent seamless transition to T+1.

T+1 settlement in Europe

Moving to T+1 settlement would be more challenging in EU considering the complex and fragmented EU financial markets with multiple currencies and financial market infrastructures. Challenges include extended trading hours in certain markets, market inconsistencies, CCP interoperability, and batch-based matching and settlement at centralized securities depository (CSD) in certain markets. With reduced time to manage post-trade processes in T+1, batch-based processing will shrink the time available for market participants to resolve exceptions and potential spike in settlement fails. Harmonization of market practices, real-time matching capability, and extended cut-offs for intraday settlement in CSDs are essential for T+1 move in Europe.

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. Key focus areas include intraday allocation, confirmation, and pre-settlement matching at CSD by end of trade date, FX operating model, securities lending, clearing and settlement, corporate actions, and client engagement. The move to T+1 will necessitate behavioral, technological, and operational changes among all market participants.

Automation had been key focus for T+1 settlement in US and firms invested in technology solutions for automation in post-trade to reduce friction and improve straight-through processing (STP). Firms can leverage existing trade matching utilities to instruct matched trades enriched with SSI to their custodian. With T+1 settlement focus shifting to UK and EU, these firms need to prioritize and implement technology solutions to increase automation in post-trade processing for UK, EU, and other markets in advance of T+1 go live to reap the benefits of improved operational efficiency and reduced operational risk. 

Impact on market infrastructure firms

Market infrastructures play a vital role in securities processing and moving to T+1 settlement will have a profound impact on market infrastructure firms, especially clearing houses and CSDs.

Clearing houses offer central clearing to reduce the counterparty risk and function as central counterparty (CCP). With some European exchanges offering extended trading hours, T2S night settlement may have to be delayed enabling CCPs to net all trades after close of trading hours and send instructions to T2S. If T2S night settlement cannot be delayed, CCPs may have to look at netting trades with cut-off in the evening on trade date, and additional netting for trades executed in late hours after cut-off. Additional requirements include real-time trade capture from exchanges and potential requirement to advance margin calls to participants to trade date. Key business capabilities impacted include trade capture, netting, margin management and client reporting. ­­Clearing houses can collaborate with vendors offering matching tools to offer central clearing for matched prime broker trades and net these trades with exchange trades, enhancing netting and clearing benefits to participants.

CSD offers securities settlement and safekeeping services in a particular market. Batch-based matching adds latency and reduces time available for CSD participants for exception management in a T+1 environment. Key requirements for T+1 settlement include shift to near real-time matching, extending intraday settlement hours, postponing night batch settlement, supporting auto-partial and partial release functionality, and offering direct connected party (DCP) facility in all T2S markets. Key business capabilities impacted include trade matching, settlement, and corporate actions.

Additionally, market infrastructures need to define industry testing strategy and drive industry testing for a smooth transition to T+1.

Conclusion

Post successful transition to T+1 settlement in US and few other American markets, focus shifted to UK, EU, and other markets operating in T+2 settlement cycle and majority of markets anticipated to move to T+1 in next 3 to 5 years. Regulatory certainty with a fixed transition date and adequate transition timeline is key for industry readiness for T+1 transition and implement required technology and operational changes. Collective effort from all industry stakeholders and leveraging best practices from US transition will enable the industry to navigate transition to T+1 settlement seamlessly.