T+1 Settlement In Europe ' The Future Of Trading

• Published date: 30 June 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Securities
• Law Firm: Borenius Attorneys Ltd
• Author: Teo Virtanen

Another year is over, and now is a good time to take a look into the future and see what it might hold.

In the autumn of 2022, the Association for Financial Markets in Europe ("AFME") published a report analysing the option of moving securities trading to a T+1 settlement cycle and calling for open dialogue on this topic between the participants in European securities markets. The AFME also proposed establishing a task force to conduct a detailed assessment of the benefits, costs, and challenges of T+1 adoption.

The report published by the AFME comes after several countries, including the US, have announced plans to move from their previous T+2 cycle to the faster T+1 cycle. An example of earlier calls for a transition to a faster cycle is a white paper called "Advancing together: Leading the industry to accelerated settlement", which was published by the US Depository Trust & Clearing Corporation ("DTCC") in the spring of 2021. In this white paper, the DTCC proposed that the default settlement cycle should be replaced with T+1.

Currently, the move to the T+1 settlement cycle is expected to occur in the US at some point in 2024. Similar discussion is to be expected in Europe. What is the expected outcome of this discussion? What are the benefits and challenges of adopting the T+1 cycle? Read on for a more detailed discussion of these topics.

The basics: what is a settlement cycle?

The settlement cycle is when the actual change of ownership takes place in securities trading. On average, when one is trading in securities, the trade is matched immediately after the buy and sell orders align. This day is referred to as the trade date (T).

The matching engine connects a seller with a buyer to complete the trade on the agreed terms and price, but the securities and cash will still need to be transferred. The buyer is not entitled to dividends or any other rights or obligations that the securities confer before they are transferred.

The settlement process is required for the change of ownership to take place. Settlement currently takes place, on average, on the second day after the trade has matched. That day is referred to as T+2 to demonstrate the delay between the trade and the settlement.

Settlement is primarily simply a process for exchanging information, which is done to ensure that the securities and cash are delivered to the right recipients. This is process is mostly automated but does sometimes require manual intervention, which is done in the back...