The European Securities and Markets Authority (Esma) on Monday published a roadmap that proposes 11 October 2027 as the date for the European Union to adopt a T+1 securities settlement cycle, cutting the time between trade execution and settlement from two days to one.
The move would align the bloc with the United States, which transitions to T+1 in May 2025, and the UK, which has targeted year-end 2027 for its own adoption.
Esma’s analysis, based on input the industry provided earlier this year, suggests that swifter settlement can reduce risk positions held by clearing houses by some 47 percent, with a risk reduction of 30 billion euro for equities and 25 billion for bonds.
“Margin savings and the reduction of costs linked to the misalignment with other major jurisdictions globally, represent important benefits for the EU capital markets,” Esma concluded.
Misalignment costs
Tanguy van de Werve, director general of the European Fund and Asset Management Association (Efama), told Investment Officer that a European move to T+1 settlement is “critical” in terms of maintaining Europe’s competitiveness in global financial markets.
“Misalignment with a key market like the US generates ongoing costs that harm the competitiveness of our products over time, particularly among global investors,” he said. “Efama believes that end-2027 is an achievable date, and it will allow much-needed coordination with key jurisdictions like the UK and Switzerland.”
Esma’s roadmap:
While the transition promises greater market efficiency and risk reduction, Esma’s analysis found significant operational challenges and uneven costs across the industry.
During a background briefing, Esma officials said they estimate a medium-sized bank faces three to 10 million euro in upfront investment costs in terms of IT investments. The regulator conceded there may be an uneven distribution of these upfront costs, with some market participants bearing a heavier burden than others in the short-term.
The transition is expected to be particularly challenging for European ETFs invested in the United States, given that for more than two years, different settlement periods will be in place.
‘Thursday effect’
Esma cited anecdotal evidence that shows investing in US securities becomes more expensive for ETF fund managers as they need to cover a longer funding gap. This has even resulted in what has been identified by the industry as the “Thursday effect”.
This means that investing in US securities for European ETF manufacturers will be more expensive on Thursdays due to the need to cover a funding gap from Thursday until the following Monday. Therefore, according to feedback received by Esma, there would be a significant drop in investments on Thursdays.
T+2 increasingly seen as a liability
Last week’s Euroclear Collateral Conference in Brussels, attended by 600 industry professionals, made it clear that Europe has no choice but to follow the U.S. The current T+2 cycle is increasingly seen as a liability, especially in bond trading. According to Euroclear, the discrepancy in settlement speeds between Europe and other major markets could undermine the European Union’s competitive standing.
Friction
The transatlantic mismatch between T+1 and T+2 creates operational inefficiencies for large investors, including the temporary need for cash as collateral and hedging against currency fluctuations (euro/dollar). One trader referred to these challenges as “frictions we could do without.”
Retail investors are also feeling the impact. Online broker Bux notes on its service page that the disparity between Europe’s T+2 and the US’s T+1 causes issues for retail investors who sell European shares and immediately wish to use the proceeds to buy US shares. Due to the asynchronous schedules, the funds from the European transaction are not available in time for the US purchase.
Since European settlement takes one day longer, Bux has no option but to make the funds “unavailable” for one day to buy US shares. However, selling a US share to buy another US or European share can still be done immediately.
Scaling up
Europe’s longer settlement cycle is linked to its fragmented market. The continent is home to dozens of clearinghouses (CCPs) and settlement platforms (central securities depositories or CSDs) that handle the post-trade legal and operational processes.
Euroclear, for instance, operates national CSDs for Belgium, the Netherlands, Finland, France, Ireland, Sweden, and the UK. This fragmentation stems from the historical organisation of European stock exchanges on a national basis, each with its own settlement platform.
“The push for T+1, which is inevitable, could act as a catalyst for further integration,” was the hopeful message at the conference. “Let’s approach this step by step. We don’t need a single uniform platform like in the US. Europe isn’t America, and monopolies are never a good thing. But if we could reduce the number of settlement platforms to five or six, that would be significant progress.”
“It’s no silver bullet, but implementing T+1 could be a significant push towards greater standardisation and convergence in European post-trade processes,” Euroclear said.
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