French regulator Autorité des Marchés Financiers (AMF) and Banque de France have released a joint paper proposing a two-step approach to the European Union’s move to T+1 settlement.
Europe is now in a ‘when not if’ situation when it comes to its plans to shorten its settlement cycle, as confirmed by the European Commission in January earlier this year.
In their statement, the AMF and Banque de France have suggested a two-pronged approach as “the most pragmatic way forward”.
The first step is a prerequisite to the second and will involve all trades being confirmed/allocated “as soon as practicable and no later than on trade date”.
The industry will be responsible for ensuring improvements in standardisation and common market practices in the EU such as market infrastructure cut offs and settlement of cross border transactions and ETF shares.
As part of step one, the T2S operator must be offered sufficient time to prepare for the settlement of an increased volume of trades during the real time settlement period, as well as for the postponing of the night batch settlement.
The pair confirmed that in order to ensure step one is completed, the European Commission should launch working groups with all stakeholders.
Step two is dependent on step one – wherein if the level of transactions confirmed/allocated on trade date is deemed as ‘sufficient’ then the settlement cycle could be reduced to T+1.
In the event of this happening, the AMF and Banque de France have suggested that rules should be carefully designed to ensure the continued attractiveness of European instruments to foreign investors.
The pair said this two-pronged approach would allow Europe a sufficient observation window to learn the necessary lessons from North America’s shift to T+1.
“Even if these markets are not fully comparable with the EU markets, it will be interesting to observe the impact,” said the pair in their proposal.
As part of their paper, the AMF and Banque de France have also tabled other methods for achieving T+1, such as leveraging the best execution or additional settlement costs of US processes to “go beyond setting up a mandatory cap and find incentive measures or tools” or the transitional measures used to implement the CSDR cash penalties mechanism.
A united approach
Coordination between the UK and Europe has been routinely flagged by stakeholders from across the industry.
The current misaligned nature of the global settlement regime has unearthed several market nuances that participants are now trying to navigate in the best possible manner.
One such theme noted by traders is the Thursday conundrum. Given that the settlement cycle is now shorter in the US trading volumes on a Thursday have dropped off significantly thanks to funding requirements that require brokers to fund a position for an additional three days on Friday, Saturday and Sunday given the slightly longer settlement cycle in Europe, the UK, and most of Asia Pacific.
Thursday volumes have been noted as “muted” thanks to what some are claiming is an extra five basis point charge on trading for orders made on that day thanks to broker funding requirements over the weekend.
While the UK is a less complex market and a shift to shortened settlement cycle could be achieved on a quicker time scale than Europe, UK regulators have slowed immediate plans for the shift following calls from participants that issues around misalignment would simply be repeated.
The AMF and Banque de France have suggested a coordinated approach with the UK and the UK Accelerated Settlement Taskforce.
“Given the interdependencies between these two markets and the ambitious timeline put forward in the UK report, such a coordination should start as soon as possible,” they said.
The UK put together a taskforce in 2022, releasing its first report in March this year which confirmed that the UK should move to T+1 no later than December 2027. Its final report will be published at the end of this year.