The UK recently drafted recommendations to shift from T+2 to T+1 settlement for securities trading. The European Securities and Markets Authority (Esma) is set to unveil its own plans by the end of the year, for the EU to make the same leap.
The interest from the EU and UK to cut to T+1 is largely in order to realign their markets with those in the US, which moved to T+1 in May.
At the time of its move, the US published reports that claimed affirmation rates were higher and settlement rates better than before, in what the market considered a smooth transition.
But the costs, in the US, to make it happen were large and European and UK investors who are still on T+2 are continuing to pay for it.
For example, an investor in the EU would sell a European stock on a Thursday to buy a US stock that day, but they wouldn’t get the proceeds of their sale in Europe until Monday, despite having to pay for the US stock on the Friday, meaning they were short cash over a weekend.
The only clear benefit of moving to T+1, as far as issuers and investors are concerned, is to get back on track with the US.
Indeed, investors and trade bodies told GlobalCapital this week that they wouldn’t have chosen to make the move to T+1 on their own, if the US hadn’t created the misalignment in the first place.
The UK proposes to get to T+1 by a deadline of 2027 but it will be expensive for investments firms to pour money into automating their trading processes. Smaller players will be hit the hardest.
For something that is supposed to create efficiency, it sure is about to generate a lot of costs.