T+1 deadline brings market misalignment into focus

The deadline for when the US, Canada and Mexico move to T+1 is approaching fast. On May 28, 2024, trades will be settled more quickly on one side of the Atlantic compared to the other. 

If one wanted to be dramatic, one could call it a transatlantic rift with US policy driving the change, and the UK and EU playing catch-up. The subject is clearly on the EU’s agenda as it has organised a roundtable discussion for which the keynote speaker will be US Securities and Exchange Commission chairman Gary Gensler.  

There has been much commentary on what both should do and there are several trade organisations that have just published their perspectives on it.  

These are contained in responses to the European Securities and Markets Authority’s (Esma’s) call for evidence on T+1 that closed in December last year. The Investment Company Institute (ICI) and its subsidiary ICI Global, the Association for Financial Markets in Europe (Afme) and the International Capital Market Association (Icma) all wrote lengthy replies. 

When read together, they give a well-rounded perspective of how T+1 is seen from the US, Europe and more international standpoints. The similarities and differences on various points are worth exploring.  

View from the US 

For instance, ICI is the association that represents regulated investment funds in the US, whose members include mutual, closed-end and exchange-traded funds. According to its website, the membership is nearly universal but the organisation is rooted in US securities law. 

In its submission to Esma, ICI and ICI Global both say they encourage EU authorities to decide in early 2024 to move to T+1 settlement and to communicate a path for implementation in a 24–30-month timeframe. 

Both argue this will ensure everyone has a reasonable and realistic amount of time to adapt to the move. In a statement accompanying the publication of the response, Michael Pedroni, head of ICI Global, said: “Acting expeditiously will help minimise the duration of misalignment with the North American markets. EU regulators should also coordinate with other jurisdictions and establish dedicated dialogues with the UK and Switzerland to facilitate a globally aligned move to T+1.”

The consultation response also lists a couple of advantages of migrating to a T+1 regime such as enhanced cash and liquidity management for various fund types. Retail investors would benefit from expedited cash and securities deliveries, too. Also, overall trade settlement would be more efficient for retail and institutional investors. 

ICI said that it helped to lead industry efforts to prepare for the move to T+1 in the North American markets through the industry working group it set up. This was made up of more than 800 subject matter advisers representing more than 160 firms from buy- and sell-side firms, custodians, vendors, and clearing houses. ICI added that it has brought this experience to the European industry task force convened by Afme.

ICI went on to warn that the EU should not be too ambitious and move to a T+0 regime.    

“We urge the EU not to pursue moving to T+0 settlement at this time, as this represents a substantially more complex undertaking than moving to T+1, would misalign settlement cycles worldwide, and would reduce the efficiency of EU capital markets,” Mr Pedroni added. 

Tread carefully 

Icma takes a different line from ICI about how quickly the EU and UK should move to a T+1 regime. Its response was produced by Icma’s T+1 taskforce, representing around 150 members, including sell-sides, buy-sides, market infrastructures as well as other relevant service providers.

In the document, Icma said that before any further steps towards T+1 are taken, it is important to wait for the US migration and allow sufficient time to fully assess the implications. 

“At that point we will be in a much better position to assess the need and the urgency for an EU (and UK) move to T+1. There should be no urgency to reach a conclusion on this question,” it continued. 

In a recent article written for The Banker, Icma’s chief executive Bryan Pascoe emphasised the importance of learning from the US. 

“Watching the US experience unfold and taking the time to get all the requisite building blocks lined up and in place is essential to ensure potentially costly mistakes are avoided,” he wrote.  

One encouraging fact from history is that there has been a gap in settlement times between the US and EU before. Icma’s response observes that the EU moved from a T+3 to a T+2 cycle in October 2014, while the US remained on a T+3 settlement cycle for three more years until September 2017. While not ideal, this did not cause any unacceptable disturbances. 

Afme is well aware of the costs of any botched implementation and cautions against a phased migration approach that splits migration dates within an asset class or by transaction type.

It argues this would create additional complications for cross-border settlement, and increase the overall duration and cost of any implementation for the industry. 

According to Afme, settlement chains can be formed of a multitude of different transaction types, and therefore migrating a subset of transaction types would break chains and create settlement failures.

Afme is adamant that any move to a default T+1 settlement cycle must not introduce new risks or damage the existing efficiency and functioning of EU capital markets.

Meanwhile, the creation of barriers to investing in the region’s securities markets, or diminished access to capital markets for issuers, would be contrary to capital markets union objectives.

Pete Tomlinson, director of post trade at Afme, said: “If a decision to move to T+1 is made, it will be necessary to define an appropriate timetable that generates industry momentum and provides clarity to market participants.”

With the May deadline fast approaching, EU and UK policy-makers must quickly decide what they will do and how. The clock is ticking and time is short.