The transition to T+1, which shortens market settlement timeframes from two days to one, has been a topic of conversation around our London office for a while now. ESMA has just proposed Europe moves to T+1 on 11 October 2027.1 And the shift raises key questions. How will the transition unfold? How might the transition in the US influence the approach taken in the UK and Europe? And most importantly, what steps must UK-based firms take to be ready for the change?
In speaking with our US colleagues, what initially sounded like a major change turned out to be relatively smooth when US exchanges transitioned to a shorter settlement cycle in May 2024. Given that the shift went off without too much of a hitch in the world’s largest market, one might assume it will be just as seamless here, right? Well, not quite. There is broad consensus that close co-ordination across UK, the European Economic Area (EEA), and Swiss markets is essential and with all these markets expected to transition to T+1 in alignment, there are a lot of considerations at play.2
The scale and diversity of these markets adds layers of complexity that must be fully considered in planning for a successful transition in Europe. This is even before we start looking at regulators, dual listings, operating hours, and other operational nuances across jurisdictions.
|
US
|
Europe (EEA, UK, Switzerland)
|
|
|
Listing Exchanges |
3 |
35 |
|
Trading Exchanges |
16 |
41 |
|
Local Currencies |
1 |
14 |
|
Equities Market Regulators |
1 |
33 |
So, while the US may be the largest market in the world by market cap, Europe’s scale and complexity must be carefully managed to ensure this transition is a success. To navigate these complexities, we can draw valuable lessons from the US transition to T+1, while also looking at emerging markets such as India and China who have also transitioned to a shorter settlement cycle.
For those funds operating in global markets, the US shift to T+1 has created ripple effects, increasing foreign exchange costs and complicating transactions in markets with differing settlement cycles. It further complicates the funding of trades where funds are received the day after settlement in some cases, and two days later in others. Managing these different settlement cycles within funds increase both complexity and cost for asset managers.
There are clear benefits to the UK and broader Europe in moving to a shorter settlement cycle and aligning with the US; however, several important lessons must be learned to ensure a successful transition.
While the US ultimately transitioned successfully to a T+1 environment, a key pitfall encountered by firms along the way was the lack of sufficient automation.3 Firms that relied on manual processes struggled to cope with the increased volumes, higher levels of exception management, and shorter timeframes that come with a shorter settlement cycle. Those who underestimated the impact of reduced settlement cycles were forced to increase headcount, subsequently raising costs to manage the volumes while retroactively considering where they could implement automation to bring those headcount and costs back down to pre-transition levels.
It is one thing to manage processes in a single market, governed by a single regulator, operating in one trading time zone, and using one currency. However, expanding that management across multiple jurisdictions, time zones, currencies, and regulators represents a far greater challenge to market stakeholders that should not be underestimated.
At the end of September, the UK’s Accelerated Settlement Taskforce Technical Group published their draft recommendations report for industry considerations and consultation.4 This report outlined 43 principal recommendations as well as 14 additional (non-essential) recommendations. The 43 principal recommendations cover the “critical post-trade activities [firms] must be able to complete efficiently if the UK’s transition to T+1 is to be successful.” It is the intention that the final version of these recommendations constitute a ‘Post-trade Code of Conduct,’ clarifying that organisations must adhere to these guidelines rather than view them as optional. Collective buy-in and adherence to these recommendations allows for greater regulatory compliance and operational efficiency across the industry, ultimately benefiting all participants.
Many of the operational recommendations focus on automation. As evidenced in the US, the automation of manual processes is critical not just for transitioning to a T+1 environment but also for moving toward same-day and instant settlement. Organisations will need to explore automation across all functions that the settlement cycle touches, including trade processing, funding, securities lending, corporate actions, and fund settlement mismatches. Automation accelerates processes and enhances accuracy, as despite our best efforts, humans are still prone to errors. Firms that neglect this transition risk falling behind their competitors, resulting in potential increases to headcount, elevated costs, a rise in errors or failed trades, and diminished overall profitability.
An exciting thing about markets is their continued ability to evolve. Over the past 40 years, the London Stock Exchange has gone from a fortnightly ‘account’ system of settlement, which operated for over two centuries, to a T+2 trade cycle, with T+1 now on the horizon. While major Western markets have historically led such changes, emerging markets, notably India and China, are now setting new standards.
India completed its move to a T+1 settlement cycle in early 2023, but took a unique, staggered approach, unlike the US’s ‘big bang’ model, where all companies moved at once. India’s approach came with initial challenges, such as increased error rates and failed trades. After a brief adjustment period, rates did eventually normalise. Today, India offers same-day settlement for the top 500 companies by market cap—making it, alongside China, one of the only countries to provide this option to equities investors. The Securities and Exchange Board of India views this as a stepping stone to instantaneous settlement,5 something not yet seen in other equities markets around the world.
Despite slow adoption of same-day settlement, India’s progressive moves signify a broader shift toward more efficient and flexible market operations. These advancements are not only reducing transaction risk but also paving the way for investors to execute larger trades with greater confidence due to liquidity being ‘locked-in’ for a shorter period of time.
As Europe prepares for its T+1 transition, embracing a mindset that anticipates further evolution is essential. This means recognizing that the T+1 settlement cycle is just one step on a journey toward increased efficiency, flexibility, and competitiveness. By studying the varied strategies and outcomes of markets like India and China, European market participants can better prepare for future developments, ensuring that their operational frameworks are robust enough to adapt to ongoing changes in the financial landscape.
Although no specific date is set for the UK’s transition to T+1, and a coordinated approach across Europe is still undecided, market sentiment—and ESMA’s proposal for shortening the settlement cycle in the EU—suggests that a unified transition is slated for Autumn 2027. This timeline provides European market participants with just under 3 years to prepare effectively for this change.
Preparation for T+1 will demand more than technical updates; firms will need to assess their current operating models, identify areas that require change, and allocate resources for a smooth implementation. Drawing from other markets, the US announced its transition date 14 months in advance, and India’s phased move took 12 months to implement across all listed equities.
The US shift to T+1 this year has led to misalignment across major global markets and increased costs due to foreign exchange (FX) issues and funding challenges. Traditionally, UK FX transactions were managed the day after a trade (T+1) since settlements occurred the following day. However, starting in May, FX for US trades required same-day processing to meet T+1 settlement timelines. Many non-US fund managers have responded by pre-funding, holding cash, or relying on FX services from custodians—often at increased costs due to higher spreads.
While alignment across global markets should gradually reduce these costs, additional operational strategies and specialised products are available to further minimise expenses associated with funding and FX.
As European markets look toward a T+1 settlement cycle, the experience of other regions offers valuable insights. Automation emerges as a crucial component for success, helping firms manage the operational demands of a faster settlement process. Beyond T+1, the pace of change in global markets underscores the need for flexibility and future-proofing in Europe’s settlement infrastructure.
Preparing now, with a clear focus on strategic automation and operational resilience, will ensure that UK firms are not only ready for T+1 but also positioned for ongoing evolution of market settlement practices. By learning from global peers, UK and European market participants can confidently chart a smooth path to T+1 and beyond, turning this challenge into an opportunity for growth and efficiency.
Read more: Don't Make T+1 the Next Y2K
1 ESMA proposes to move to T+1 by October 2027 (2024), ESMA.
2 IA T+1 transition in the UK, EU and Switzerland (2024), The Investment Association.
3 UK AST Technical Group Draft Report and Recommendations (2024), T+1 Technical Group.
4 ibid.
5 Introduction of optional T+0 and optional Instant Settlement of Trades in addition to T+1 Settlement Cycle in Indian Securities Markets (2023), SEBI.