Enjoy the T+1 Change in the US? Report Says You May Not in Europe

While FX desks will probably find a switch to T+1 in the UK and European Union helpful, given it provide them with a coordinated spot date for GBP/USD and EUR/USD, for other markets, the switch, planned for October 2027, promises to be more complex and require higher budgets, according to a new report.

The report, Tackling Post-Trade Friction: Supporting a Global Shortened Settlement Cycle, was published by Firebrand Research, a capital markets research and advisory firm, in collaboration with Clearstream, The Depository Trust & Clearing Corporation (DTCC) and Euroclear. It says that the complexity involved means that technology teams will have to be larger, and that the budget for the transition could reach $36 million for a large global custodian.

Greater automation, naturally, is seen as the key to overcoming the challenges, which will come against a background of the Settlement Discipline Regime in the EU which can levy financial penalties for settlement failures.

The report, the authors of which spoke to operations and technology teams at 45 firms, finds that 71% of these firms’ failures in 2024 were caused by counterparty shorts and 21% by data issues, including stale standing settlement instructions (SSIs). An average of 83% of firms’ equity flow goes through automated central trade matching and an average of 71% of fixed income flow, but more automation is needed, the report states.

“Improved operational processes and automation between post execution trade matching and pre-settlement matching at the CSD is necessary to eradicate mis-match issues relating to SSIs and place of settlement (PSET) that cause trade failures,” the report asserts. “Firms active in the European markets face issues regarding the timely sharing of accurate and detailed settlement data and differences in custodian and financial market infrastructure (FMI) and custodian market practices.”

Interestingly, one of the interviewees’ greatest concerns was “foreign exchange misalignment”. Clearly with the US already at T+1, this will not involve two of the three biggest FX markets in the world from a hedging perspective, although there will, naturally, be infrastructure challenges given the extra currencies extant in the EU and the different regulatory regimes.

“The European move to T+1 is undoubtedly much more complex from a planning and implementation standpoint than the North American transition. Not only are there more currencies, market infrastructures, market participants and regulators involved, there are also significantly different market practices to accommodate,” says Virginie O’Shea, founder of Firebrand Research. “However, the research also shows that valuable lessons have been learned in previous moves to shorten the settlement cycle such as the benefits of early testing and strong governance.”

Val Wotton, global head of equities solutions, DTCC, adds, “While the report highlights operational issues and data inconsistencies as significant challenges, leveraging the lessons learned from other regions’ move to T+1 – particularly regarding automation and client engagement – will be instrumental in ensuring a smooth transition across European markets. Post-trade automation has proven to be a critical enabler of T+1 settlement, significantly reducing errors and operational costs, therefore, it is imperative that firms allocate sufficient resources and budget to invest in advanced automation systems, including technology to support central matching and standing settlement instructions.

Further, we strongly advise firms to commence impact assessments, counterparty analysis, and process optimisation initiatives,” he continues. “Initiating these efforts early and utilising available resources can significantly enhance the transition to T+1.”