T+1 settlement dates for UK, EU announced: What can they learn from US and Indian markets?

Key Takeaways

• EU, UK and Switzerland agree to begin T+1 settlement from October 2027.
• Shorter settlement cycles intended to boost capital utilization, but there are a number of challenges to implementation.
• Learning lessons from global markets that have already transitioned to T+1 is key to a smooth migration in Europe.

It is official. The United Kingdom (UK) will move to a T+1 settlement cycle in 2027. According to the UK T+1 Accelerated Settlement Taskforce (UK AST), 11 October 2027, will mark basis. Switzerland and the European Union (EU) have also chosen the same day for their transition.

India, the world’s fourth-largest stock market, transitioned to T+1 in 2023 and is now progressing toward same-day (T+0) settlement. In May 2024, the US, Canada, and Mexico followed suit and implemented T+1 settlements for stocks, bonds, and exchange-traded funds.

Debates within the UK industry were split on whether it should follow the US’s swift transition approach, or stick to a more gradual strategy adopted by the EU. Last month, the UK AST announced that it is willing to take a step forward.

What is T+1 settlement?

A settlement cycle is the time between a trade’s execution and the final settlement, during which ownership and payment for securities are exchanged. Regulators often perceive this time gap as a risk period. The longer the time between trade and settlement, the higher the risk of a party not paying for or delivering the securities.

In the 1990s, the period between trade execution and settlement was around five days. It was later cut to three days and eventually to two. Soaring volumes during thec highlighted the potential benefits of further shortening the settlement cycle. During this time, some American companies, including retail broker Robinhood, blamed the two-day settlement window for operational challenges, citing difficulties in managing increased trading volumes, which eventually initiated the conversation for the switch.

Benefits of T+1 settlement in UK, EU, and Switzerland

Policy makers expect shorter settlement to make financial markets more efficient and boost global competitiveness. The move promises several other benefits. With the UK and the EU modernizing their settlement cycles, they can align more closely with the US, India, and other global markets. There are also expectations that a shorter gap between trade and settlement will reduce credit and counterparty risks, enable more effective capital utilization and reduce margin requirements.

What are the challenges for the UK and the EU markets?

Dealing with different time zones is definitely the biggest challenge for the T+1 system. Though large markets like the US and India have already modernized their settlement cycles, most other markets have yet to start the transition process. If you’re trading in a different time zone, managing foreign exchange can be challenging. Securities lending faces added risks, as firms have less time to recall loaned securities, increasing the likelihood of failed trades. ETFs with a blend of T+1 and T+2 securities could see disruptions.

Firms relying on legacy technology and manual processes could also struggle with the shift to T+1 settlement.

There are also several challenges that are specific to Europe. The EU lacks a unified legal framework or post-trade system. Though the European Central Bank’s TARGET2-Securities (T2S) supports compressed settlement cycles, the markets are extremely diverse, with a plethora of rules and operating nuances and multiple clearing and settlement institutions.

The biggest challenges are in the steps that come before settlement itself. In a bid to improve post-trade efficiencies, the processes need to be sped up and automated. This change requires collaboration across the industry, including investors, intermediaries, custodians, and market infrastructure providers.

In the US, the Depositary Trust and Clearing Corporation (DTCC) took the lead in preparing for T+1. As well as working with other industry stakeholders to plan the migration and address potential issues, the DTCC also deployed technological innovations to support a shorter settlement. The most notable of these was the Match-to-Instruct (M2i) workflow, which combined and streamlined several stages of the post-trade process. As a vendor, ION worked closely with DTCC to support M2i, and the wider migration to T+1. Such collaboration between industry stakeholders, including vendors and infrastructure providers like DTCC, will play a key role in delivering shorter settlement cycles across the different European markets and jurisdictions.

What lessons can the UK and the EU learn from the US and Indian markets?

Industry stakeholders have highlighted the key roles of automation and regulatory support in supporting a smooth transition to a T+1 cycle. The US Securities and Exchange Commission’s decision to set a clear compliance deadline set the ball rolling for the US market as a whole; will the recent deadlines set by European regulators have a similar effect?

India was the first to adopt the T+1 settlement cycle, which was mostly considered successful, but there were a few challenges. For example, late settlement rates rose as some market participants struggled to adapt in time. An ION article pointed out that ” the phased approach that the Securities and Exchange Board of India took kept the disruptions to a minimum, allowing laggards not to fall far behind,” which is a big lesson that can be learned from the Indian markets.

The transition to a T+1 settlement cycle in the UK, EU, and Switzerland marks a significant step. By learning from the experiences of the US and Indian markets, European stakeholders can better navigate the challenges of this transition. Emphasizing automation, regulatory support, and industry collaboration will be crucial in ensuring a smooth and efficient shift, enhancing market efficiency and reducing risks. As these markets prepare for this change, the lessons learned from their global counterparts will be invaluable in achieving a successful implementation.