The European Securities and Markets Authority (ESMA) aims to cut the time between trade execution and settlement by half by 2027. ESMA has now put in place a plan to shift to the T+1 securities settlement from the current T+2 settlement cycle.

This move seeks to enhance market efficiency, reduce risks, and align the EU with global standards. The regulator believes this shift will make the EU's post-trade processes more efficient.

Faster Securities Settlement

ESMA's latest report outlines the benefits of transitioning to a T+1 settlement cycle, which would shorten the period between trade execution and settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term from two days (T+2) to just one day (T+1).

The change aligns with broader goals to integrate EU capital markets and support the Savings and Investment Union objectives. ESMA recommends implementing the T+1 cycle on October 11, 2027.

This date reportedly avoids the logistical challenges associated with transitioning during the busy November-December period and steers clear of the first Monday of October, which often coincides with end-of-quarter activities. ESMA highlighted the importance of a coordinated, simultaneous shift across all relevant financial instruments to ensure a smooth transition.

🔴 ESMA proposes to move to T+1 by October 2027 → https://t.co/pZhEY2lYsQ.#ESMA recommends the simultaneous migration to T+1 across all relevant instruments and suggests 11 October 2027 as the optimal date for the transition to T+1 in the EU. pic.twitter.com/Oq62HJGFLG

— ESMA - EU Securities Markets Regulator 🇪🇺 (@ESMAComms) November 18, 2024

The regulator also plans to align the EU's move to T+1 with similar timelines in other European jurisdictions, minimizing cross-border discrepancies and reducing operational risks. ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term's report highlights the potential advantages of moving to T+1, including reduced counterparty risks, lower margin requirements, and cost savings from better alignment with global markets.

Costs and Benefits

Faster settlement reduces the time frame in which trades can fail, thus minimizing risks and enhancing investor confidence. However, the transition won't come without its challenges. It reportedly requires significant updates to the Central Securities Depositories Regulation and the settlement discipline framework.

Harmonization and standardization of processes will be key to enhancing settlement efficiency. According to ESMA, this will likely require investments in technology and infrastructure, pushing the financial industry toward modernization.

Following the release of its final report, ESMA plans to work closely with the European Commission and the European Central Bank to revise the existing rules on settlement efficiency.

This year, the US stock market transitioned to a T+1 securities settlement. The change applied to stocks, corporate and municipal bonds, ETFs, certain mutual funds, and other exchange-traded securities. The settlement mandates that a security bought or sold, for instance, on Monday, must be fully settled by the end of the day on Wednesday.