U.S. Firms Eye Europe’s Move to T+2

Terry Flanagan

On October 6, European markets are meant to adopt a T+2 settlement cycle, requiring a change in clearing and settlement processes and systems across the continent. The impact will not be limited to the EU.

U.S. market participants are aware that Europe’s move to shorten the settlement cycle will have ramifications for processes and systems, such as the impact of instruction cut-offs moving to the morning of T+1.

“T+2 will take 24 hours out of the process,” said Tony Freeman, executive director of industry relations at post-trade services provider Omgeo.

Further complicating matters is Target2-Securities (T2S), which aims to harmonize securities settlement in Europe by creating a single platform to settle transactions in central bank money across borders, CSDs [central securities depositories] and currencies.

“T2S (mid 2015) will further shorten the process because the settlement window actually opens in the evening of T+1,” Freeman said. “U.S. firms will need to have completed their trade confirmation process by midday, at the latest, on T+1. “

The first order of business will be for Europe to comply with T+2, a considerable undertaking in itself, as there is no centralized project management of the T+2 implementation, making it difficult to gauge overall level of preparedness.

There are three segments, according to Freeman: firms that are aware and at an advanced stage of preparation, firms that are aware but only recently started the necessary preparation and firms that are only vaguely aware and have done little preparation.

“It is estimated that 25% of European firms have not fully automated their middle office processes – this is clearly a concern,” Freeman said. Outside Europe the level of awareness and preparedness varies widely.

Of the potential roadblocks to an efficient move to T+2, the manual buy-side is the biggest concern. Lack of clarity over the rules is also a problem – for example, will fixed-income adopt a T+2 cycle when Europe’s CSD Regulation doesn’t actually mandate OTC trades to settle on a T+2 basis?

The benefits of shortening the settlement cycle in Europe for all market participants will ultimately outweigh the costs. “Universal adoption of T+2 will enable T2S to operate on a harmonized basis,” Freeman said. “T2S will – in the long term – reduce costs and enable more competition.”

Featured image via Dollar Photo Club

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