T+1 as a global standard
Oct 2024
From ambitious plans in Europe to restrained approaches in Asia Pacific, Daniel Tison explores the diverse prospects of T+1 around the globe
Image: alexzel/stock.adobe.com
May 2024 marked a significant step when the US, Canada, Mexico, Jamaica, and Argentina completed their transition to the T+1 settlement cycle. With adequate preparation, the move went smoothly, resulting in minimal negative impact. At the same time, though, it led to a misalignment between major global markets, which may now feel “peer-pressured” to follow suit.
For Sachin Mohindra, executive director at Goldman Sachs, reducing that misalignment risk is “absolutely paramount” due to the impact on transaction costs for the end investors.
“It hasn’t been as detrimental as some had expected it to be, but it’s still not the optimal way for the industry to be operating,” he says.
However, the move to T+1 has “a direct, day-to-day impact on trading activities”, which presents various challenges for global markets, according to EquiLend.
The first apparent challenge shared across both EMEA and APAC is the undeniable diversity in terms of multiple trading platforms, counterparties, collateral types, and fragmented jurisdictions with different legal frameworks.
Gabi Mantle, global head of post trade solutions at EquiLend, sees the key challenge in processing recalls because there is now no longer “a day's grace” to get the securities back.
She believes that automation is the answer: “There just isn't time to do things manually. There isn't time to make mistakes. So automated technology, which is there to streamline things and to make things smoother, quicker, and more accurate, is so important.”
EquiLend previously stated that a successful transition to T+1 requires a “multifaceted approach combining regulatory alignment, technological innovation, and industry collaboration”.
Post-Brexit collaboration in Europe
In December 2022, the UK government launched the Accelerated Settlement Taskforce to explore the potential for a faster settlement of financial trades. As a reaction to the taskforce’s report from March 2024, the UK has committed to moving to T+1 and set up the Technical Group to determine the details of the arising technical changes.
“Technical Group has been appointed to take forward the next phase of the work on the accelerated settlement, and we look forward to receiving their recommendations,” says a spokesperson for the Treasury. “The new government will consider the recommendations once the Technical Group’s report has been published.”
With an official deadline set to the end of 2027, the UK has been leading by example in implementing T+1 within the EMEA region.
“The purpose of putting the day out there was to set a reasonable day that would be a realistic time frame, but also puts enough pressure on the industry to start acting now,” says Mohindra, who sits on the UK Accelerated Settlement Taskforce and Technical Group. Despite Brexit, he emphasises the significance of cooperation between the UK and the EU.
Mohindra believes that with effective collaboration, the three-year period is realistic for the entire European continent, as it is mostly about leveraging existing technology, making it “faster and fitter”, instead of rebuilding the whole system. At the same time, though, he prioritises a pragmatic approach, with a constant assessment of potential risks, over unnecessary rush.
Lower risks, lower margin requirements, and international realignment are the key benefits of a shift to T+1 for the European Securities and Markets Authority (ESMA), which is responsible for assessing the impact of a shorter settlement cycle and producing a detailed outline for a transition in the EU.
However, the authority is aware of the challenges associated with the move.
“The process to get to T+1 in the EU will be complex,” says an ESMA spokesperson. “It will likely require changes in Central Securities Depositories Regulation (CSDR), in existing Level 2 regulations, and potentially further regulatory guidance.”
Besides regulatory changes, ESMA also calls for international cooperation across the industry to find solutions to some of the identified challenges and put them into practice through market standards.
“In an environment such as the EU financial markets, with multiple market infrastructures, currencies, and a broad range of market participants, solving these difficulties calls for robust governance,” ESMA adds.
Following its call for evidence that closed in December 2023, ESMA published a report In March 2024, summarising market participants' views on shorter settlement cycles in the EU.
Respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment before deciding. There was also a strong demand for clear coordination between industry regulators.
Stakeholders expressed the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Some responses warned about potential infringements due to the misalignment of the EU and North America’s settlement cycles, which ESMA is currently assessing.
ESMA presented the preliminary findings of its assessment at a public hearing, which took place on 10 July 2024. During this hearing, most participants responding to a poll suggested that Q4 2027 is the preferred date for a shift to T+1 in the EU.
In a proposed roadmap, ESMA works with the deadline of 2027 although no exact date has been announced for the EU. According to this proposal, solutions to technical challenges should be defined by the end of 2025 and implemented by the end of 2026, allowing one more year for testing before going live.
ESMA is now finalising its report and expects to publish it before the end of the year, ahead of the legislative deadline on 17 January 2025. European authorities will confirm their approach by the end of 2024.
Outside of the EU, Mohindra expects to see the traditional collaboration among Scandinavian countries extend to shortening the settlement cycle, as well. “There’s now a real strong sense of collaboration across the whole of the European region, not just UK and EU anymore, and I think that’s very important,” he says.
On that note, Mantle adds: “There will be so many markets that do change altogether that I think those non-EU markets who are not part of the discussion would possibly be at a disadvantage if they don't. So I suspect that they will also follow suit.”
Will South America align with the North?
In June 2023, the International Securities Lending Association (ISLA) set up a dedicated working group to assess the impact of T+1 in EMEA. However, according to Fran Garritt, executive director at ISLA Americas, the association is “actively exploring” the potential implications of T+1 beyond the EU and the UK, and ISLA Americas will work closely with them on this important topic.
With Mexico and Argentina adopting T+1 this year, there have been discussions about the potential move for other LATAM countries.
Garritt says: “While Argentina's market has relatively low volumes, and foreign investors typically trade the largest caps through American depository receipts (ADRs) or global depository receipts (GDRs), its shift to T+1 sets a valuable precedent.”
Views on moving to T+1 vary across the region due to “their unique conditions, regulations, and economic priorities”, as Garritt notes.
“Brazil, with its robust financial infrastructure and active capital markets, is particularly well-positioned to transition to T+1,” he says.
Although Chile, Peru, and Colombia appear to be “more cautious” about the move, Garritt continues, the integration of T+1 within the Mercado Integrado Latinoamericano (MILA) could offer a coordinated approach across the member markets.
Collaboration is “essential” for this transition, according to Garritt, and ISLA Americas is committed to supporting this process through its working groups and partnerships.
He adds: “By engaging with onshore and offshore stakeholders, as well as leveraging insights from ISLA’s work in Europe and the Americas, we aim to support a smooth transition to T+1 in LATAM while also addressing the broader needs of these key markets.”
Garritt believes that T+1 may help Latin American countries attract more offshore participants by reducing the time between trade execution and settlement, which can lead to greater liquidity, better pricing, and a more dynamic market environment.
At the same time, he acknowledges that the transition also presents several challenges, including the need for technological upgrades, changes to operational processes, and adjustments to market practices.
“Moreover, market participants will need to adapt to a faster pace, which could strain resources and necessitate comprehensive training and education initiatives,” says Garrrit.
“However, with careful planning and coordination, these challenges can be managed to ensure a successful transition to T+1 in the LATAM region.”
Restraints across APAC
The smooth transition of Northern America has also sparked discussions in major Asian markets like Singapore and Japan, with regulators exploring a coordinated Asia-wide move to T+1. While China already uses T+0 for stock settlement and T+1 for cash settlement, the rest of the region still follows T+2.
Mantle sees particular challenges in certain parts of continental Asia when it comes to implementing T+1. She says: “Some of the Asian markets have pretty strict settlement regimes already, and they have quite punitive settlement fail rules, as well, so I think the impact there is possibly going to be harder felt.”
Australia is currently focusing on developing a new electronic system for the clearing and settlement of trades that would replace the current Clearing House Electronic Subregister System (CHESS). In a public consultation held by the Australian Securities Exchange (ASX), industry stakeholders unanimously advised against implementing T+1 simultaneously with replacing CHESS due to “increased risk and effort”.
Commenting on the feedback received during the consultation, ASX said: “Given the very recent transition of North America and that Europe and the UK are not likely to transition until after 2027, we share the market’s view that there is little appetite to transition to T+1 immediately.”
Implementing T+1 after the release of CHESS replacement would enable the industry to benefit from the new system, but it would also mean a transition to T+1 scheduled for around 2030. Taking into account all of the above, this is ASX’s “proposed and preferred recommendation”, as part of its consultation paper from August 2024.
The Treasury of the Australian government adds that another key consideration is the impact of time zone differences: “If Australia moves to T+1, countries such as the US and the UK will effectively face a T+0 environment for investment in Australia. ASX has suggested that for these trades, most trade processing and matching will likely need to happen overnight.”
Mixed prospects for the future
Looking ahead, Mohindra expects T+1 to become “a global standard”. He says: “It's going to be a natural compounding effect of that peer pressure of all the industries coming together to move to T+1 as a standard going forward.”
In terms of preparation, Mohindra advises financial firms to conduct a comprehensive assessment, collect data and test new technologies, ahead of the change to T+1. “It’s like exercising for a marathon; we can start getting fitter and healthier today,” he says. “Understanding which market, clients, and counterparties we need to work with to improve that [transition] is going to be really key.”
Similarly, Mantle stresses the importance of good preparation. “Adopting things up front is definitely important,” she says. “Don’t underestimate how long we’ve got.”
Nevertheless, she remains sceptical about implementing T+1 as a global standard in the near future due to the significant differences in certain markets across the world. She says: “For some of the more emerging markets, some of those less mature markets, I think it would be a bigger undertaking for them to make a change. So they may never align.”
A potential for international cooperation between markets has been seen not only in Europe, but also in the LATAM and APAC regions. Mohindra celebrates this cooperation as, according to him, T+1 will only work well if everyone is ready for it together. He adds: “I certainly encourage firms to think about playing that active role because T+1 is a community effort, and the more representation you have across the financial community, the more robust and timely implementation we will end up having.”
For Sachin Mohindra, executive director at Goldman Sachs, reducing that misalignment risk is “absolutely paramount” due to the impact on transaction costs for the end investors.
“It hasn’t been as detrimental as some had expected it to be, but it’s still not the optimal way for the industry to be operating,” he says.
However, the move to T+1 has “a direct, day-to-day impact on trading activities”, which presents various challenges for global markets, according to EquiLend.
The first apparent challenge shared across both EMEA and APAC is the undeniable diversity in terms of multiple trading platforms, counterparties, collateral types, and fragmented jurisdictions with different legal frameworks.
Gabi Mantle, global head of post trade solutions at EquiLend, sees the key challenge in processing recalls because there is now no longer “a day's grace” to get the securities back.
She believes that automation is the answer: “There just isn't time to do things manually. There isn't time to make mistakes. So automated technology, which is there to streamline things and to make things smoother, quicker, and more accurate, is so important.”
EquiLend previously stated that a successful transition to T+1 requires a “multifaceted approach combining regulatory alignment, technological innovation, and industry collaboration”.
Post-Brexit collaboration in Europe
In December 2022, the UK government launched the Accelerated Settlement Taskforce to explore the potential for a faster settlement of financial trades. As a reaction to the taskforce’s report from March 2024, the UK has committed to moving to T+1 and set up the Technical Group to determine the details of the arising technical changes.
“Technical Group has been appointed to take forward the next phase of the work on the accelerated settlement, and we look forward to receiving their recommendations,” says a spokesperson for the Treasury. “The new government will consider the recommendations once the Technical Group’s report has been published.”
With an official deadline set to the end of 2027, the UK has been leading by example in implementing T+1 within the EMEA region.
“The purpose of putting the day out there was to set a reasonable day that would be a realistic time frame, but also puts enough pressure on the industry to start acting now,” says Mohindra, who sits on the UK Accelerated Settlement Taskforce and Technical Group. Despite Brexit, he emphasises the significance of cooperation between the UK and the EU.
Mohindra believes that with effective collaboration, the three-year period is realistic for the entire European continent, as it is mostly about leveraging existing technology, making it “faster and fitter”, instead of rebuilding the whole system. At the same time, though, he prioritises a pragmatic approach, with a constant assessment of potential risks, over unnecessary rush.
Lower risks, lower margin requirements, and international realignment are the key benefits of a shift to T+1 for the European Securities and Markets Authority (ESMA), which is responsible for assessing the impact of a shorter settlement cycle and producing a detailed outline for a transition in the EU.
However, the authority is aware of the challenges associated with the move.
“The process to get to T+1 in the EU will be complex,” says an ESMA spokesperson. “It will likely require changes in Central Securities Depositories Regulation (CSDR), in existing Level 2 regulations, and potentially further regulatory guidance.”
Besides regulatory changes, ESMA also calls for international cooperation across the industry to find solutions to some of the identified challenges and put them into practice through market standards.
“In an environment such as the EU financial markets, with multiple market infrastructures, currencies, and a broad range of market participants, solving these difficulties calls for robust governance,” ESMA adds.
Following its call for evidence that closed in December 2023, ESMA published a report In March 2024, summarising market participants' views on shorter settlement cycles in the EU.
Respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment before deciding. There was also a strong demand for clear coordination between industry regulators.
Stakeholders expressed the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Some responses warned about potential infringements due to the misalignment of the EU and North America’s settlement cycles, which ESMA is currently assessing.
ESMA presented the preliminary findings of its assessment at a public hearing, which took place on 10 July 2024. During this hearing, most participants responding to a poll suggested that Q4 2027 is the preferred date for a shift to T+1 in the EU.
In a proposed roadmap, ESMA works with the deadline of 2027 although no exact date has been announced for the EU. According to this proposal, solutions to technical challenges should be defined by the end of 2025 and implemented by the end of 2026, allowing one more year for testing before going live.
ESMA is now finalising its report and expects to publish it before the end of the year, ahead of the legislative deadline on 17 January 2025. European authorities will confirm their approach by the end of 2024.
Outside of the EU, Mohindra expects to see the traditional collaboration among Scandinavian countries extend to shortening the settlement cycle, as well. “There’s now a real strong sense of collaboration across the whole of the European region, not just UK and EU anymore, and I think that’s very important,” he says.
On that note, Mantle adds: “There will be so many markets that do change altogether that I think those non-EU markets who are not part of the discussion would possibly be at a disadvantage if they don't. So I suspect that they will also follow suit.”
Will South America align with the North?
In June 2023, the International Securities Lending Association (ISLA) set up a dedicated working group to assess the impact of T+1 in EMEA. However, according to Fran Garritt, executive director at ISLA Americas, the association is “actively exploring” the potential implications of T+1 beyond the EU and the UK, and ISLA Americas will work closely with them on this important topic.
With Mexico and Argentina adopting T+1 this year, there have been discussions about the potential move for other LATAM countries.
Garritt says: “While Argentina's market has relatively low volumes, and foreign investors typically trade the largest caps through American depository receipts (ADRs) or global depository receipts (GDRs), its shift to T+1 sets a valuable precedent.”
Views on moving to T+1 vary across the region due to “their unique conditions, regulations, and economic priorities”, as Garritt notes.
“Brazil, with its robust financial infrastructure and active capital markets, is particularly well-positioned to transition to T+1,” he says.
Although Chile, Peru, and Colombia appear to be “more cautious” about the move, Garritt continues, the integration of T+1 within the Mercado Integrado Latinoamericano (MILA) could offer a coordinated approach across the member markets.
Collaboration is “essential” for this transition, according to Garritt, and ISLA Americas is committed to supporting this process through its working groups and partnerships.
He adds: “By engaging with onshore and offshore stakeholders, as well as leveraging insights from ISLA’s work in Europe and the Americas, we aim to support a smooth transition to T+1 in LATAM while also addressing the broader needs of these key markets.”
Garritt believes that T+1 may help Latin American countries attract more offshore participants by reducing the time between trade execution and settlement, which can lead to greater liquidity, better pricing, and a more dynamic market environment.
At the same time, he acknowledges that the transition also presents several challenges, including the need for technological upgrades, changes to operational processes, and adjustments to market practices.
“Moreover, market participants will need to adapt to a faster pace, which could strain resources and necessitate comprehensive training and education initiatives,” says Garrrit.
“However, with careful planning and coordination, these challenges can be managed to ensure a successful transition to T+1 in the LATAM region.”
Restraints across APAC
The smooth transition of Northern America has also sparked discussions in major Asian markets like Singapore and Japan, with regulators exploring a coordinated Asia-wide move to T+1. While China already uses T+0 for stock settlement and T+1 for cash settlement, the rest of the region still follows T+2.
Mantle sees particular challenges in certain parts of continental Asia when it comes to implementing T+1. She says: “Some of the Asian markets have pretty strict settlement regimes already, and they have quite punitive settlement fail rules, as well, so I think the impact there is possibly going to be harder felt.”
Australia is currently focusing on developing a new electronic system for the clearing and settlement of trades that would replace the current Clearing House Electronic Subregister System (CHESS). In a public consultation held by the Australian Securities Exchange (ASX), industry stakeholders unanimously advised against implementing T+1 simultaneously with replacing CHESS due to “increased risk and effort”.
Commenting on the feedback received during the consultation, ASX said: “Given the very recent transition of North America and that Europe and the UK are not likely to transition until after 2027, we share the market’s view that there is little appetite to transition to T+1 immediately.”
Implementing T+1 after the release of CHESS replacement would enable the industry to benefit from the new system, but it would also mean a transition to T+1 scheduled for around 2030. Taking into account all of the above, this is ASX’s “proposed and preferred recommendation”, as part of its consultation paper from August 2024.
The Treasury of the Australian government adds that another key consideration is the impact of time zone differences: “If Australia moves to T+1, countries such as the US and the UK will effectively face a T+0 environment for investment in Australia. ASX has suggested that for these trades, most trade processing and matching will likely need to happen overnight.”
Mixed prospects for the future
Looking ahead, Mohindra expects T+1 to become “a global standard”. He says: “It's going to be a natural compounding effect of that peer pressure of all the industries coming together to move to T+1 as a standard going forward.”
In terms of preparation, Mohindra advises financial firms to conduct a comprehensive assessment, collect data and test new technologies, ahead of the change to T+1. “It’s like exercising for a marathon; we can start getting fitter and healthier today,” he says. “Understanding which market, clients, and counterparties we need to work with to improve that [transition] is going to be really key.”
Similarly, Mantle stresses the importance of good preparation. “Adopting things up front is definitely important,” she says. “Don’t underestimate how long we’ve got.”
Nevertheless, she remains sceptical about implementing T+1 as a global standard in the near future due to the significant differences in certain markets across the world. She says: “For some of the more emerging markets, some of those less mature markets, I think it would be a bigger undertaking for them to make a change. So they may never align.”
A potential for international cooperation between markets has been seen not only in Europe, but also in the LATAM and APAC regions. Mohindra celebrates this cooperation as, according to him, T+1 will only work well if everyone is ready for it together. He adds: “I certainly encourage firms to think about playing that active role because T+1 is a community effort, and the more representation you have across the financial community, the more robust and timely implementation we will end up having.”
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