In May 2024, the United States, Canada and Mexico will move to a shortened settlement cycle for security transactions. Starting from May, transactions in those markets will settle on a T+1 basis. The impacts of this change will be felt well beyond those markets given the size of the global investor base in US securities. EFAMA has been engaged in understanding the broader impacts, contributing to the industry’s preparedness, and maintaining a regular dialogue with regulators.
At the same time, both the UK and EU are reviewing their settlement cycles with a view to aligning with the United States. EFAMA is actively contributing to this effort. This is a complex task given on the one hand, the diversity and number of infrastructure providers in Europe and on the other, a UST1 reality which in itself will generate significant costs due to global misalignment.
How to avoid a new Herstatt crisis?
It has been a while since Herstatt risk has been referenced in financial circles and certainly in the mainstream media, however, it is something that the European fund management industry is concerned about as the deadline for shortening the US settlement cycle draws near.
EFAMA is pleased to share its response to the ESMA Call for Evidence on shortening the settlement cycle. In light of the imminent US move to T1, EFAMA supports a timely transition to T1 for Europe, while calling for a dynamic roadmap which can be adapted and modified as lessons from the US migration become known.
As the US moves to a T+1 settlement cycle from May 2024, the settlement mismatch between the US and EU will raise operational challenges as well as, we suspect, market structure changes. But another direct consequence of the mismatch will be in the enforcement of current EU regulation. In this paper, we identify those scenarios where EU rules will be tested, suggest the scope of that impact and ask policymakers to explore how the regulatory impacts of US T+1 can be mitigated.
“The European T+1 Industry Task Force welcomes the recent publication of a report by the Chair of the UK Accelerated Settlement Task Force, and in particular the statement that the “UK and other European jurisdictions should continue to explore opportunities for close collaboration…to see if they can align their moves to T+1.” The members of the European T+1 Industry Task Force emphasise the need for a coordinated approach between the EU/EEA, Switzerland and the UK.
EFAMA research estimates that 40% of daily FX flows are at increased risk
EFAMA is pleased to share its response to the ESMA Call for Evidence on shortening the settlement cycle. In light of the imminent US move to T1, EFAMA supports a timely transition to T1 for Europe, while calling for a dynamic roadmap which can be adapted and modified as lessons from the US migration become known.
