The CSSF has published a communiqué drawing attention to the Final Report providing the assessment of the shortening of the settlement cycle in the European Union (EU), published on 18 November 2024 by the European Securities and Markets Authority (ESMA) (the “ESMA Report”).
The ESMA Report proposes a move to T+1 as of 11 October 2027, identified as the optimal date for the implementation of a one-business-day settlement cycle for all relevant instruments in the European Union. This date aims to ensure alignment with the United Kingdom in their shift to T+1.
New “T+1” Settlement Cycle
The transition to T+1 follows similar changes already implemented in the United States, Canada, and Mexico (please refer to our previous article for details on the United States).
Currently, most securities transactions in the European Union operate under a T+2 settlement cycle. This means transactions are settled two business days after the trade date. For example, if you sell shares of X stock on Monday, the transaction would be completed, or "settled", on Wednesday.
The ESMA Report proposes aligning the European Union’s practices with this shift already implemented in the United States. Consequently, this change will mean that securities transactions will settle just one business day after the trade date. For instance, if you sell shares of X stock on Monday, the transaction will now settle on Tuesday instead of Wednesday.
Context and Implications
The ESMA Report outlines key benefits, including risk reduction, margin savings, and cost efficiencies achieved through alignment with other major jurisdictions. However, it also identifies challenges, such as the need to amend regulations and harmonise practices. Operational processes between fund managers and associated parties such as the fund’s depositary bank may need to be reviewed to take into account the shortened period. There will be less time to process trade information and instruct settlement which could impact the NAV calculation process. To address these issues, ESMA intends to work closely with the European Commission and the European Central Bank on T+1 governance.
The CSSF recognises the potential impact of the T+1 transition on operational processes, systems, and resources. It encourages affected entities to initiate the necessary analyses and technical preparations to adapt effectively. Entities should assess whether substantial functional or organisational changes are required, maximise the use of existing tools and mechanisms, and explore new solutions to ensure a smooth transition to T+1.
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