T+1 - Europe and UK aligned for Q4 2027

·       Despite our supposed differences, the EU & UK appear to be much more aligned than in previous discussions on the move to T+1 - with an online poll suggesting 70% in favour of a move to T+1 by Q4 2027.

·       There was a significant shift in sentiment towards T+1 in the EU in a move to match other markets.

·     With recognition of a global domino effect, estimating that 70% of market will be T+1 making it detrimental for the EU not to also move, particularly in relation to CMU

·       Strong desire for alignment between UK and EU from across market participants

·       View that T+1 is now "do-able" provided that the industry has enough certainty asap in relation to timescales

·       Move to T+1 in US (although early) appears to be successful with minimal impact incurred, although here the industry has seen unique challenges as a result of funding requirements

·       The industry is already adapting with trading patterns accommodating a drop in volumes on Thursday due to the extra 5bps broker charge to fund over the weekend

·       It was noted that T+1 should not be seen as a “magic bullet” to solved European interoperability issues – fragmentation across Europe is still an issue and political action is needed to solve this

·       Clear appetite to address the challenges now so the industry is technically ready to hit the ground running

·       Clarification of definitions for non-mandatory activities such as (Sec Lending and Collateral Management) will be key

On current state of play after US Move

·      Little impact seen as yet from moving securities lending from T+3 to T+1

Essential utilization rate, loan duration and lending fees stable after the US move to T+1

ESMA will continue to analyse costs and benefits of a similar EU market move, including the impact of greater automation and standardisation on operational risk

There is still difficulty in estimating margin decreases and the impact of CCP risk management models. Analysis thus far shows that larger CCPs have slightly less savings due to more offsets between trading days while smaller CCPs have the potential opportunity for higher percentage savings.

·       Potential impact on liquidity outflows due to reduced positions and tension points for CCPs to manage intraday margins

On proposed move by EU to T+1

·       Buy side now sees consensus on EU move to T+1, operationally possible with UK/Switzerland alignment while acknowledging that there will be an impact on settlement efficiency - likely impacting smaller/medium players disproportionally.

·       Noted that nothing exists currently in Level 1 text to prevent market participants from settling earlier than T+2

·       Market participants felt that primary legislation was still required, along with rulebooks from infrastructure providers and associations as well as regulators and industry best practice guidelines.

·       Importance in establishing an industry roadmap for shortening settlement cycles, including international industry bodies/taskforce plus new changes from forthcoming Commission.

·       Possible EU-UK Taskforce similar to UK Taskforce – although it was noted that industry is already addressing this (AFME work and collaboration from EFAMA amongst other EU bodies in working with UK Taskforce)

·       UK Taskforce achievements highlighted as achieving two years of work in just 6 months which could act as a base level for industry requirements to work from. 

·       Issues in moving to T+1 may not be as complex as first feared but acknowledgement that education on issues were key to find workable solutions in time remaining.  Draft report due Q3 2024.

·       Collaboration between public and private sectors deemed crucial to success, including blockchain and DLT

·       Recommendation for market participants to be mandated to settle transactions 1 business data after conclusion

·       Potential of T2S to facilitate significant progress in move to T+1 but again clear road marks/defined timeline needed now to achieve successful transition to T+1 in 2027

·       Focus needed on penalties and resource allocation level 2 changes to ensure readiness for T+1

Impact on Fund Industry in Europe

·       Given impact of the US migration to T+1 settlement on ETF trading, volumes and pricing, possible early move for dual-listed and later move for ETFs – rejected by some.

·       ETF market has held up well despite initial fears with settlement rates not being as negatively impacted as first thought

·       Areas that need addressing include monitoring trading volumes having already seen a switch in trading activity due to increased funding costs over a weekend.  One participant noted the 40% rise in volumes since implementation vs trading activity the 6 weeks prior implementation date; on Thursdays’ this volume increase drops to just 5%.

·       Challenges of interoperability, funding, and settlement cycles pose risks for issuers and investors when looking at dual listed securities with different key dates of the same security

European governance is critical but more complicated due to the different jurisdictions - however a centralised governance structure could help address these challenges in corporation action and withholding tax. The US experience emphasises that centralised ownership and leadership have a key role in the successful implementation of T+1.

·       ESMA observed that their staff remain ready to hear from all stakeholders – from market participants to end investors and retail participants on their views and concerns.

There was an overarching request from all participants from both jurisdictions for clarity, transparency and consistency in the roadmap to meet T+1 implementation. Whatever the outcome tonight – lets keep focused on the long-term goal (no pun intended!) and remember once again – there is more that unites us than divides us.

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