The European Union is accelerating efforts to reduce the securities settlement cycle from two days (T+2) to one day (T+1), which is in line with international trends. ESMA has highlighted several hurdles, including the need for harmonization, standardization, and modernization of systems across the EU.

According to the regulator, the upgrade will require significant investments, and market participants are advocating for amendments to the Central Securities Depositories Regulation to ensure a smooth transition.

Transition to T+1

As global financial markets increasingly adopt the shorter cycle, the EU is taking steps to catch up. One of the central challenges facing the EU is ensuring that all stakeholders across sectors and regions are on the same page.

With the highly interconnected nature of European capital markets, a coordinated approach is essential. To achieve this, ESMA is working with the European Central Bank (ECB) and the Directorate-General for Financial Stability to lay the groundwork for a seamless transition to T+1.

Given the experience of other regions, close collaboration between regulators and market participants is crucial. Authorities are setting up a governance structure to oversee the technical preparations, ensuring that the process remains inclusive and represents all sectors and regions in the EU.

1/3 Next steps to support a transition to T+1?

▪️ the impacts in terms of risk reduction, margin savings and 📉 of costs linked to the misalignment with major jurisdictions globally, bring along benefits for the Savings and Investments Unionhttps://t.co/Set1y9jfdP pic.twitter.com/QZB025yopR

— ESMA - EU Securities Markets Regulator 🇪🇺 (@ESMAComms) October 15, 2024

T+2 has been the standard for settling securities transactions for over a decade, meaning trades are settled two business days after execution Execution Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Read this Term. However, countries like the US, Canada, and Mexico have already adopted a T+1 standard, speeding up settlements to the next business day.

This has prompted the EU to assess its readiness for such a shift, aiming to remain competitive in the global financial landscape. The ESMA has been tasked with studying the potential impact of T+1 on EU markets. Preliminary findings suggest the move will reduce risk, lower costs, and align the EU with other major financial hubs.

Coordination Across Europe

Adopting T+1 would bring multiple benefits. It would lower the risk associated with unsettled transactions, potentially saving margin costs and reducing exposure to market volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term. However, implementing this change will require significantly modernizing the EU’s post-trade infrastructure.

Additionally, harmonizing the EU with other regions following the T+1 model could streamline cross-border transactions, reducing misalignment costs. Improving efficiency could also help strengthen the EU’s Savings and Investment Union, boosting economic resilience.

The EU is under pressure to avoid falling behind other global financial centers, particularly as more regions embrace T+1. Failure to act quickly could prolong the misalignment with major jurisdictions, potentially amplifying negative impacts on the European market.