Esma rules out T+0 move

Esma rules out T+0 moveEurope’s securities market will not be moving to same day settlement any time soon judging by the recent comments from the European Securities and Markets Authority (Esma).

The regulator has issued a statement based on the industry feedback it received about the impact of a shortened settlement cycle.

Esma has proposed moving from T+2 to T+1 and issued a consultation paper back in October 2023.

The idea has been largely a result of the US market’s decision to move to T+1. Consequently, the EU now has to decide whether it aligns with the US and thus avoids lags in the post-trade process, especially for any transactions involving US participants.

Esma described the feedback as ‘mixed’. There is an acceptance that T+1 would reduce counterparty risk and is, in many ways, unavoidable now that the US has made the move.

However, there are also concerns about the reduced time for completing post-trade processes amid a lack of automation, inventory management issues and the cost of system changes and technology upgrades.

A number of respondents are consequently unconvinced that the benefits of the move to T+1 outweigh the cost.

However, one area where the responses of the 81 market associations were unanimous was the proposed move to T+0.

“The majority of respondents have indicated that whichever definition of T+0 would be given, the costs of such moves would largely outweigh the benefits,” stated Esma.  

“According to many respondents, T+0 would not be achievable in the short or medium term, it would require radical changes to the way markets operate and would likely involve new technologies which are not yet deployed at sufficient scale in financial markets.”

Other disadvantages mentioned by respondents include a potential loss of anonymity in trading and pressure on liquidity due to the need to have all transactions pre-funded.

“Esma agrees with the feedback received on T+0. As such, Esma will focus its work on shortening the settlement cycle on T+1,” stated the regulator.

Esma will now deliver its final assessment to EU lawmakers before the end of the year and prior to the legislative deadline of January 17, 2025.

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