ESMA published the Report on its assessment of the shortening of the settlement cycle in the EU to T+1 yesterday, 18 November 2024.

Key points:

• As expected, the suggested transition date falls in Q4 2027 (11 October 2027) – there will not be a phased transition. Notably the latest indications from the UK are that its move to T+1 is likely to take place in H2 2027 – final recommendations are expected from its Accelerated Settlement Technical Group by the end of 2024 (following its recent consultation on its draft recommendations).
• The work involved in moving to T+1 will have three stages: finalising the solutions that are needed by Q3 2025, implementing those solutions by end-2026, and testing throughout 2027 in advance of the 11 October 2027 deadline.
• Article 5(2) of the Central Securities Depositories Regulation (CSDR) will need to be amended. At the moment, it mandates a T+2 settlement deadline but does not preclude settlement on a T+1 (or T+0) basis.  The planned amendment to Article 5(2) will make it clear that the settlement deadline for in-scope instruments will be no later than T+1 (to give legal certainty).  The remainder of Article 5(2) will not change (as the in-scope instruments will not change).
• Some changes will be made Regulatory Technical Standards on Settlement Discipline (Settlement Discipline RTS) to ensure continued settlement efficiency following the move to T+1. ESMA plans to submit its final report on these changes in Q3 2025.  ESMA doesn’t plan to recommend changes to the penalty mechanism but may propose “a moderate increase to some of the penalty rates”.  It will also review the Guidelines on Standardised Procedures and Messaging Protocols once the changes to the Settlement Discipline RTS have been finalised.
• ESMA noted that it has been challenging to quantify the costs and benefits of a move to T+1. However, based on its work to date to assess the impact of a move, its view is that the EU capital markets would benefit from the impact of such a move in terms of risk reduction, margin savings and the reduction of costs linked to the misalignment with other major jurisdictions.  The potential impact on people management and staff (in particular those involved in middle/back-office activities and post-trading processes) was highlighted, and ESMA flagged both the importance of investments in automation and system upgrades, and the need to learn from the US experience of its T+1 move.  ESMA also received feedback from stakeholders that a key industry concern is post-move deterioration in settlement efficiency (with a related increase in cash penalties).  However, it noted that substantial evidence (including qualitative data) would need to be provided by market participants before any steps (in the context of the planned governance framework – see below) would be considered in this regard (such as a time-limited suspension of cash penalties).
• ESMA isn’t ruling out a move to T+0 in the longer term (following the move to T+1), pending a more detailed assessment.

Next steps:

• The work necessary to revise Article 5(2) of the CSDR and the Settlement Discipline RTS will now begin.
• As announced in the joint ESMA / European Commission / ECB statement on 15 October 2024, details of a governance structure will be published shortly which will oversee and support the technical work involved in the move to T+1. For more information, read our insights here: T+1 Settlement: Next Steps (EU governance structure) – Arthur Cox LLP.

Our previous T+1-related insights can be found here: Shortening the Settlement Cycle against a backdrop of “instantaneous everything” – Arthur Cox LLP and US moves to T+1 settlement cycle; ESMA recommendation expected in Q3 – Arthur Cox LLP.