AFME's Garcia: Should Europe join the race to shorten settlement cycles?
30 September 2022
Significant technological advances have changed the way we work, live and interact. This is no different for securities markets, where the industry continues to seek opportunities to improve efficiency through advancements in technology and standardisation.
For example, recently, the US, Canada and India announced their
intention to shorten settlement cycles to one business day (T+1), while
most securities transactions are currently settled within two business
days. The US and Canada plan to adopt T+1 in what is understood to be a
“big bang” implementation in late 2024. The move to accelerated
settlement cycles is seen as a way to lower risks to financial systems
and drive greater efficiencies in post-trade processes. The question
arises on whether Europe should also follow suit.
The European region is characterised by a multitude of currencies,
market infrastructures, and distinct legal frameworks. Compared to the
US, Canada or India, which are single national markets, Europe’s capital
markets are notable for their diversity, the complexity of their legal,
fiscal and regulatory frameworks, and for the large number of
regulatory, supervisory and infrastructure bodies.
These structural differences have historically brought challenges when
it comes to harmonisation and efficiency of post-trading in European
financial markets, making the adoption of T+1 in Europe a more complex
proposition.
The case for and against settlement cycles in Europe is not
straightforward. While many of the benefits of the US adapting T+1 stand
for Europe, there is simply more complexity to consider.
What is a settlement cycle?
Simply explained, a settlement cycle
is the time period between when a transaction is agreed and executed by
a buyer and a seller (i.e. the trade date) and when the transaction is
completed and the securities and cash are exchanged (i.e. the settlement
date). This process is not much different to that of any other
commercial transactions that happen across a shop counter.
However, while the transfer of cash and goods happens simultaneously in a
shop, the settlement process of securities transactions occurs at a
different time than the execution of the trade. There is a time window
between trading and settlement which allows for several important
processing steps to take place, ensuring a high degree of control and
efficiency, as required for processing high volumes and values of
securities transactions.
European markets were operating on a three business-day settlement cycle
(T+3) until 2014, when a majority of European markets adopted a two
business-day approach (T+2) in preparation for the direct application of
Article 5 of the Central Securities Depositories Regulation (CSDR). The
US followed suit in 2017 and adopted a similar move to T+2. Over the
years, advancements in technology and standardisation have allowed for
this window to be reduced...more at AFME
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