Emerging Strategy for Post-Trade Gains Clarified

Emerging Strategy for Post-Trade Gains Clarified

The European Securities and Markets Authority (ESMA) has unveiled a roadmap for the implementation of a T+1 securities settlement cycle, with the aim of achieving a smoother and more efficient transition by 2027. Despite initial discussions pointing towards a 2022 target, the current focus remains on the 2027 timeline.

## Key Technological Changes

The shift to T+1 settlement necessitates substantial technological changes for banks, brokers, and investors. These changes include:

1. **Operational Efficiency**: To accommodate faster settlement cycles, systems must be adapted to handle increased transaction speed. This encompasses improving trade processing, confirmation, and allocation systems.

2. **Automated Processes**: The implementation of automated systems for trade matching, confirmation, and settlement is crucial. This will reduce manual errors and ensure compliance with the new settlement timeline.

3. **Data Management**: Enhanced data management systems are required to manage the increased speed and volume of transactions. This includes upgrading data storage and analytics capabilities.

4. **Compatibility and Integration**: Harmonising messaging protocols and settlement procedures across different platforms and entities is essential to ensure seamless integration.

## Potential Costs and Penalties

The transition to T+1 settlement comes with potential costs and penalties for service providers. These include:

1. **Operational Costs**: Service providers may face increased operational costs due to system upgrades and additional staff training.

2. **Failed Trades Penalties**: The Central Securities Depositories Regulation (CSDR) imposes cash penalties for failed trades. These penalties can be significant, costing the industry around €70 million per month, and may increase under T+1 timelines if firms fail to adapt efficiently.

3. **Regulatory Compliance**: Non-compliance with T+1 regulations can lead to financial and reputational risks. Service providers must ensure they adhere to the new standards to avoid these risks.

4. **Market Impact**: High rates of failed trades can impact market participants' ability to source liquidity, as counterparties may be deterred by the risk of costly penalties.

## Recent Developments

- **Exemptions for SFTs**: Recent political agreements have exempted securities financing transactions (SFTs) from T+1 settlement obligations, providing some flexibility for market participants.

- **Suspension of Penalties**: There is a possibility of temporarily suspending cash penalties for settlement fails under certain conditions, which could mitigate some costs for service providers.

ESMA is encouraging industry collaboration and consultation throughout the transition process. The roadmap includes guidelines for service providers to meet the requirements of the T+1 settlement, as well as timelines and milestones for the transition. The authority is also working closely with national regulators to coordinate the transition across Europe.

In summary, the transition to T+1 settlement in Europe requires significant technological and operational changes, with potential costs and penalties for non-compliance. However, ESMA's roadmap aims to help Europe's banks, brokers, and investors prepare for this change, and the authority is considering potential adjustments to existing regulations to facilitate the transition.

[1] European Central Bank (2020). T+1 Settlement: A Step Forward for the European Securities Market. [2] European Parliament and Council (2020). Regulation (EU) 2020/1503 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds. [3] European Securities and Markets Authority (2021). T+1 settlement: ESMA's roadmap.

1. For businesses in the European financial sector, the transition to T+1 securities settlement cycle necessitates substantial technology upgrades, such as automating processes, enhancing data management systems, improving operational efficiency, and ensuring compatibility and integration across various platforms.
2. As the financial industry prepares for the T+1 settlement, potential costs and penalties are looming, including increased operational costs, cash penalties for failed trades under the Central Securities Depositories Regulation (CSDR), and reputational risks from non-compliance, emphasizing the need for efficient adaptation to avoid these risks.

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