EU Accelerated Settlement

In ESMA’s Call for Evidence on the Shortening of the Settlement Cycle, ESMA seeks to understand the potential advantages and drawbacks of shortening the settlement cycle, including impacts on market participants, counterparty risk, and market efficiency.

The call explores the necessary changes to regulatory frameworks and market practices to support a shorter settlement cycle, such as updates to post-trade processes and infrastructure. ESMA aims to assess the potential costs and benefits associated with shortening the settlement cycle, considering factors such as operational changes, technological requirements, and potential impacts on market competitiveness.

The call examines the possibility of a phased approach to shortening the settlement cycle, gradually reducing the settlement timeframe to mitigate risks and challenges.

ESMA’s Call for Evidence on shortening the settlement cycle in the EU has significant implications for the Securities Lending & Borrowing (SLB) market. Shorter settlement cycles would likely require more frequent collateral adjustments, which could increase operational complexity for SLB participants, especially those with large portfolios. The need for higher liquidity to meet shorter settlement cycles could affect funding costs for SLB participants. The transition to a shorter settlement cycle could impact the calculation of counterparty risk, requiring adjustments to risk management frameworks, and also require market participants to adapt their operational processes and systems to ensure timely settlement and collateral management. While this may promote the adoption of new technologies, such as Distributed Ledger Technology (DLT), which could facilitate shorter settlement cycles and improve the efficiency of SLB transactions, smaller firms may not be able to adopt these increasing operational infrastructure costs and experience decreased competitiveness.

While the transition to a shorter settlement cycle might present challenges, it could also offer benefits for the SLB market. As accelerated settlement could reduce counterparty risk by decreasing the time between trade and settlement. A more efficient settlement process could benefit wider capital markets, including the SLB market. Lastly, a shorter settlement cycle in the EU could enhance its competitiveness with other jurisdictions that have already shifted to T+1.

ISLA welcomes the opportunity to respond to the ESMA Call for Evidence on shortening the standard settlement cycle. This is a very important topic for our members and ISLA, who represent the international securities lending markets within Europe. The topic impacts our members across multiple securities lending market segments – beneficial owner, agent lender, borrower, and service providers (e.g., vendors). ISLA’s T+1 Taskforce was established in July 2023 and has coordinated our response to this consultation. In addition to work undertaken by us on this topic, ISLA also has joined with an EU cross-industry Taskforce on T+1, which was established in March 2023, bringing together 21 trade associations. ISLA is also actively involved in the T+1 discussion in the UK as a member of the UK’s HMT T+1 Accelerated Settlement Taskforce.

In December 2023 ISLA both participated in a joint trade association response to the ESMA Call for Evidence on Shortening the Settlement Cycle, with high-level remarks of the European T+1 Industry Task Force and sent our own response to ESMA.

In April 2024, ISLA in collaboration with the other members of the European T+1 Industry Task Force emphasised the need for a coordinated approach between the EU/EEA, Switzerland and the UK in a response to the H1 2024 UK report on moving to T+1.

In October 2024, ISLA in collaboration with the other members of the European T+1 Industry Task Force published a High-level Roadmap for Adoption of T+1 in EU Securities Markets.