By Ulrike Uitz and Florian Sager

At the end of May this year, the settlement cycle in securities business was shortened in the USA, Canada and Mexico. T+1 now applies in place of the previous T+2 – the deadline for the fulfilment of stock exchange transactions in shares, corporate bonds and fund units has been halved to one day. Following the initiative of the US Securities and Exchange Commission (SEC), the issue of T+1 is also increasingly taking centre stage for European markets. How can banks prepare their systems for this major project? And does a possible T+0 default have to be taken into account? This article is intended to provide some initial answers.

“Securities trading in the USA will be significantly faster than in Europe”, summarises the headline in the “Handelsblatt” news publication on the subject of shortening of the settlement cycle on the other side of the Atlantic. In view of the fact that local banks, brokers and custodians also hold securities accounts in US depositories – be it as domestic custody or on a securities account – institutions have had to adapt their systems accordingly in recent months. One important aspect here is that the time difference to the USA results in a significant reduction in the processing time for European market participants and thus an increased risk potential for penalties by the SEC.

Against the backdrop of this development, the discussion concerning the introduction of T+1 for European markets will also intensify. Since March 2023, the Association for Financial Markets in Europe (AFME) has deployed a task force of market-leading companies working towards the coordinated introduction of T+1 across the EU, Switzerland and the UK. Special focus is placed on the challenges posed by the fragmented market infrastructure within Europe.

In October of last year, the European Securities and Markets Authority (ESMA) also launched a survey among market participants to ascertain what effects, costs and benefits the shortening of the securities settlement cycle in the EU could entail, and which introduction period would be favoured by market stakeholders.

T+1 could become mandatory as early as 2026

The responses shed light on the fact that banks, exchanges and custodians are calling for a clear signal from regulators to start work on T+1, and for transparent coordination between regulators and wider industry. Stakeholders are also making it clear that a proactive approach is required, in order to adapt their own processes to the transition to T+1 in other countries. Some respondents warned of possible infringements due to the different settlement cycles in the EU and North America, which is currently the subject of review by the ESMA.

The supervisory authority now intends to analyse the responses received in greater detail and, in tandem, monitor developments in the context of the transition to T+1 in the USA. ESMA then plans to submit a final assessment to the European Parliament and the EU Council before 17 January 2025. This means that T+1 could become mandatory for local financial service providers as early as 2026.

Guidelines for the large-scale T+1 project

Financial institutions are now faced with the question of how this major regulatory project can be conceptualised – both professionally and from a technical standpoint – which stakeholders need to be involved and what resources need to be planned in the process.

With our broad capital market expertise and many years of project experience in securities settlement, we recommend the following approach:

1. Customised analysis: All of the bank’s proprietary settlement processes must be considered in detail – including the trade funding processes.
2. Identification of sources of optimisation potential in house: Which of the bank’s own processes need to be streamlined or changed? Which stakeholders need to be involved? Processes need to be digitalised (or at least automated).
3. Analysis of all external factors: Review of the entire settlement chain – i.e. trading systems involved (including trading hours), clearing and settlement platforms, data processing systems and communication networks (including interfaces) and other intermediaries. All existing contracts and SLAs with partners must also be reviewed from the perspective of T+1.
4. Project work: Here, the potential described under 2) needs to be fine-tuned for the respective stakeholders. The development of a joint test cycle is also mission-critical, and experience has shown that this requires a great deal of organisation.

T+0 can only be implemented via distributed data structures (DLT)

At industry meetings, however, a much more radical target of T+0 is already being discussed: the settlement of securities transactions in real time. At the “Crypto and Digital Assets Summit” hosted by the Financial Times, T+0 was recently described as the “holy grail” that stands at the end of the ever-shortening settlement cycle.

Based on our vast array of experience in securities projects, we have come to the clear conclusion that T+0 cannot be implemented on the basis of existing settlement systems. Real-time settlement of shares, corporate bonds and fund units is currently only conceivable via DLT protocols such as blockchain, Ethereum or Corda, which was often used by financial service providers for prototypes in the past. Here, we identify a potential development towards tokenised securities, which should run parallel to the existing market infrastructure, but could even replace it in the long term due to major efficiency gains.

Our conclusion: With T+1, market participants are now facing yet another major regulatory project in the medium term that will have to be tackled by adapting the (banks’ proprietary) securities systems in good time. DPS is on hand and will be happy to advise you.