The Association for Financial Markets in Europe (AFME) has published a whitepaper, discussing whether Europe should follow the US’ example and move from a T+2 to a T+1 cycle.
The paper, entitled “T+1 Settlement in Europe: Potential Benefits and Challenges”, outlines the benefits of maintaining global alignment.
With many jurisdictions beginning to move to T+1, capital markets end users could benefit from Europe doing the same, says AFME. The paper goes on to cite reduction of associated costs as a virtue of the T+1 system.
Limited open exposures over the settlement period will reduce margin requirements, and allow firms to better manage capital and liquidity risk, according to the association. Credit, counterparty, and market risk will also be reduced.
However, the paper also considers the industry challenges of moving to T+1. AFME predicts that the allocated time for post-trade activities will be reduced by 83 per cent, putting considerable pressure on firms.
There is also an increased chance of settlement fails, as the timeline to identify and recall securities is compressed. This would lead to cash penalties and capital impacts under Central Securities Depositories Regulation and Basel III requirements. T+1 will also prove challenging for global participants, with time zone differences making the window of communication and resolution extremely narrow.
Exchange traded funds (ETFs) and securities-based derivatives are set to struggle more with T+1 than other markets, AFME adds. ETFs contain underlying securities from several jurisdictions, which already leads to settlement delays in a T+2 cycle. Similarly, the swap lifecycle of securities-based derivatives would need to be reassessed.
Phil Flood, regulatory expert at Gresham Technologies, says: "AFME shines a much-needed light on the seismic tech compression change the move to T+1 represents. Numerous financial institutions are already going through the process of reassessing their current post-trade operations. When making the transition to T+1, there must be a greater focus on data quality and integrity.”
Pete Tomlinson, director of post trade at AFME, concludes: “The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. A rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.
“For this reason, AFME is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption.”
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