The European financial markets face a significant change as the Autorité des Marchés Financiers (AMF) and the Banque de France advocate for a coordinated transition to the faster T+1 settlement cycle. This move aims to enhance efficiency and stability in securities transactions across the EU and marks an important development in market operations.
Embracing the T+1 Settlement Cycle
The European Commission recently endorsed the T+1 settlement cycle, paving the way for a shift in how securities transactions are settled. This faster settlement reduces the settlement period from two days (T+2) to one day (T+1). It reportedly aligns the EU more closely with global market practices.
However, the transition brings substantial challenges due to the unique specificities of the EU market. The AMF and the Banque de France highlighted the necessity of a close cooperation with key international markets, notably the UK and Switzerland.
The two institutions said a coordinated approach is important to ensure a seamless transition, given the interconnected nature of these financial markets. The interdependencies between the EU and these markets require a carefully calibrated timeline to manage the shift smoothly.
A two-phased approach has been proposed as the most pragmatic way forward. Initially, within the current T+2 settlement environment, all securities trades should be confirmed and allocated by the end of the trade date. This step necessitates essential operational and technical upgrades across the industry, including the standardization of data exchanges and automation of manual processes.
Two-Phased Approach to Implementation
The second phase involves reducing the settlement cycle to T+1 once a satisfactory level of trade confirmations on the trade date is achieved. This phased approach ensures a structured transition, mitigating potential disruptions while promoting efficiency.
The T+1 framework can also be effective by encompassing regulatory aspects and also being supported by regulatory and economic incentives. These incentives aim to facilitate the transition, ensuring that market participants are adequately prepared and motivated to adopt the new settlement cycle.
The strategy outlined by the AMF and the Banque de France aims to safeguard the stability, efficiency, and competitiveness of European financial markets. By advocating for this strategic transition, they aim to position the EU markets for a more resilient financial ecosystem.
In May, Canada moved to a T+1 settlement cycle for equity and long-term debt market trades. This step, which aligned with similar changes in the US, promised to enhance the settlement process and reduce risks associated with delayed trades.
