(Sept 28): The group spearheading the UK’s shift to a faster trading regime is preparing for the possibility that the country makes the switch in advance of the European Union (EU), a move that could create a litany of headaches for financial professionals across the region.
The UK will follow the US to the one-day settlement cycle known as T+1 in the final quarter of 2027, according to Andrew Douglas, the chair of the government-appointed team advising on the transition.
The group set out its vision for how firms should prepare in a report published on Friday, which laid out two scenarios: One in which the UK and the EU make the switch at the same time, and another in which the UK moves alone. The ideal transition would include coordination between the markets, the report said.
“It’s clear that one solution that suits the UK and our European colleagues is a much better solution than us going down different paths,” Douglas said in an interview. “The ball is in their court to work out if it’s feasible.”
The proposed time frame leaves the door open for a coordinated switch, since officials in Brussels have previously signalled that a move by the end of 2027 is possible for the bloc. The report said that recent developments in the EU suggest an “emerging appetite” for the two to align, and institutions from the bloc have been involved in the UK’s planning process.
Yet dates in 2028 have also been mooted for the EU shift, an operation that’s likely to be complicated and costly thanks to its fragmented capital markets.
“While I do think the UK move to T+1 is attainable by 2027, it will be quite ambitious for the EU to align at the same time,” Kaisha Schnoll, an assistant vice president covering trade settlements at STP Investment Services, said. “The EU markets are much more complex with specific market requirements, taxes, and securities that trade across multiple exchanges.”
Failure to coordinate could create all manner of funding mismatches and misaligned processes across two closely linked jurisdictions, likely driving up trading frictions and operational costs. Wary of the risks, industry groups such as the Association for Financial Markets in Europe have been pushing hard for the UK and EU to accelerate their settlement cycles at the same time.
Either the UK or EU going it alone before the other is ready is “what we don’t want to see”, Jim Goldie, the head of capital markets, exchange traded funds (ETFs) and indexed strategies for Europe, the Middle East and Africa at Invesco, said before the report was released. “The most important thing is to do it in a harmonised fashion. I hope as an industry, Europe will be ready to migrate by 2027. It feels like three years is enough time.”
Accelerating settlement is likely to involve both changing operational processes and upgrading technology, as well as making possible adjustments to staffing. But it would realign European markets with the world’s largest, after the US made the leap to T+1 in May alongside Canada and Mexico. A mammoth industry effort helped ensure that was a smooth transition.
A consultation published earlier this year by the European Securities and Markets Authority, the EU market regulator, showed many asset managers, banks and trade groups in the bloc are concerned that the move to settle trades on a T+1 basis will prove disruptive.
“The biggest challenge for Europe as a continent moving to T+1 successfully is disunity between the EU, UK, and Switzerland,” said Jesús Benito, the head of domestic custody and trade repositories operations at SIX. “It will be essential regulators, market participants, and market infrastructure providers collaborate effectively to traverse the fragmented market environment.”
Alongside Friday’s report, which emphasised the importance of automating processes ahead of the switch, the UK group launched a consultation on its proposals with a view to making final recommendations in January. That publication will provide implementation dates for firms, with certain preparations needing to be completed by the end of 2025 at the latest.
If the UK and EU transitions don’t align, the group recommends some instruments such as ETFs and Eurobonds remain on a slower settlement cycle initially.
“If the EU and Switzerland decide that our time framework works for them, I am very happy that we work together,” Douglas said. “Europe will make its own decision, but I remain optimistic that we will be able to do something together.”
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