Considerations on possible shortening of the settlement cycle for trades executed on regulated trading venues in the EU have advanced from discussion to planning. This has been helped by the European Securities and Markets Authority (ESMA) report, which, in November 2024, published a paper assessing the shortening of the settlement cycle to T+1.
The report was prepared based on a mandate given to ESMA under the amended CSDR regulation (Regulation (EU) 2023/2845 of the European Parliament and of the Council of 13 December 2023 amending Regulation (EU) No 909/2014 as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories and amending Regulation (EU) No 236/2012). According to this mandate, ESMA was tasked to evaluate suitability of the settlement cycle shortening, with assessing potential impact of such a change on all market participants, evaluate the costs and benefits of the shorter settlement cycle, and providing a detailed proposal for transition to shorter cycle, while considering international developments in this area and their impact on the EU capital market.
The paper published by ESMA in November 2024 presents a comprehensive evaluation of transitioning to a T+1 settlement cycle in the EU. ESMA recommends implementing the transition on 11 October 2027, aligning the EU’s transition to a shorter settlement cycle with the transition date in the United Kingdom and the settlement cycle length in the United States, which adopted the shortened settlement cycle in May 2024. The report examines feasibility, benefits, and challenges of shortening the current standard T+2 settlement cycle.
ESMA has identified reduced counterparty risk, improved liquidity and the aforementioned alignment with international standards as key benefits of moving to T+1. Additionally, the shorter cycle is expected to enhance operational efficiency and support market integration, ultimately contributing to the objectives of the Union’s savings and investment strategy.
On the other hand, ESMA highlights the complexity of the transition, arising from the diverse trading, clearing, and settlement infrastructure within the EU. Significant challenges include the shortened timeframe for post-trade processes, the need for automation and systems harmonization, and potential impacts on market liquidity. The shorter settlement cycle will also affect processing of corporate actions events, securities financing transactions, and cross-border settlements, requiring adjustments by all market participants.
ESMA emphasizes the necessity of regulatory amendments, such as to the CSDR regulation, to provide legal certainty and facilitate operational improvements. It also underscores the importance of cooperation among all stakeholders and the adoption of international messaging standards, such as ISO 20022, to ensure the smooth execution of processes.
Regarding the timeline for transitioning to the shorter settlement cycle, ESMA proposes a phased implementation, stakeholder engagement and testing to mitigate risks. While the transition to T+1 poses significant challenges, these are balanced by substantial long-term benefits in market resilience, efficiency, and alignment with global standards. The success of this initiative will depend on the coordination of regulators, market participants, and market infrastructure providers.
The full ESMA report on the shortening of the settlement cycle in the European Union is available on the ESMA website: https://www.esma.europa.eu/sites/default/files/2024-11/ESMA74-2119945925-1969_Report_on_shortening_settlement_cycle.pdf
Author: Centrálny depozitár cenných papierov SR, a.s.
