Shortening the settlement cycle to ‘T+1’

Every day, securities transactions worth more than 4 trillion. EUR are settled with EU central securities depositories every day. After careful consideration of the recommendations of the European Securities and Markets Authority (ESMA) report in cooperation with the European System of Central Banks (ESCB) and stakeholder input, the European Commission is proposing a targeted amendment to the CSD Regulation to shorten the settlement cycle for securities transactions (including shares, bonds and ETFs) within the EU from two business days (‘T+2’) after the relevant trade to one business day (‘T+1’).

Global developments – in particular the introduction of T+1 in the USA – are increasing the pressure on European market participants to follow suit. The aim is to reduce counterparty risks, utilise capital more efficiently and ensure international competitiveness.

The different execution times pose challenges for market participants in the EU when trading securities on foreign markets that have already introduced T+1. The shorter settlement time in these countries, combined with the time difference, can mean that market participants in the EU have significantly less time to settle transactions. The inefficiencies caused by the different settlement periods are also associated with additional costs for them.

Where has T+1 already been implemented?

North America has already made the switch: In the USA, Canada and Mexico, T+1 has applied to equities, bonds and funds since May 2024. India has also switched the cycle to T+1 in a staggered process between 2022 and 2023. These markets represent around 60% of global market capitalisation. Other countries such as the UK and Switzerland are preparing to switch by October 2027 at the latest – ideally in step with the EU.

Why is the Commission proposing 11 October 2027 as the date for the switch to T+1?

ESMA estimates that the financial sector will need at least 31 months to prepare for the transition and make the necessary investments and adjustments to its processes. This takes into account previous experience gained during the transition to T+2 and at international level to T+1. This meant about a year to develop and harmonise solutions. A further year for implementation and a year for testing to ensure a successful introduction of T+1 settlement on the EU capital markets.

What preparations are required on the part of the financial sector?

Experience in other countries has shown that close cooperation between the authorities and the financial sector is of the utmost importance for a smooth transition to T+1. Therefore, in January 2025, the European Commission, ESMA and the European Central Bank (ECB) created a governance structure involving the EU financial industry to accompany and support the technical preparations for the transition to T+1.

Given the strong interconnectedness of the EU capital markets with the capital markets of other European countries, in particular the UK and Switzerland, a coordinated approach across Europe is desirable in order to avoid further inconsistencies in settlement cycles and unnecessary costs for market participants.

In order to ensure a shorter settlement cycle throughout the EU, post-trade processes must be further harmonised, standardised and modernised. Technically, T+1 requires a review and adaptation of the system architecture in almost all institutions. Trading platforms, settlement software, reporting tools, interfaces to clearing and the central securities depository (CSD) must be reorganised. Internal processes such as cash management, securities lending, corporate action processes and compliance reporting must also be adapted. For banks, T+1 also entails changes to liquidity management requirements. Payments must be available one day earlier, and the time available for financing via repo or FX transactions will be shorter. This can lead to an early need for intraday liquidity. On the other hand, the shortened cycle reduces the number of open positions and therefore the level of counterparty risks and collateral requirements (margins).

Effects on market participants and systems: Requirements, opportunities and challenges

The switch to a shortened settlement cycle from T+2 to T+1 represents one of the most significant operational and infrastructural changes in European securities trading in recent years. For market participants such as stock exchanges, banks, central securities depositories and institutional investors, this means far-reaching technical, organisational and procedural adjustments – but also substantial potential for increasing efficiency.effects on market participants and systems: Requirements, opportunities and challenges.

Trading and settlement processes under time pressure
For banks and brokers, this means a considerable reduction in operational lead times – especially for cross-border or complex transactions.

While today many processes are completed overnight or the following day, under T+1 numerous steps must be completed on the same day. This increases the pressure on straight-through processing (STP) and forces greater automation. The trade confirmation processes of institutional clients are particularly affected, which in future will ideally have to be completed by the evening of the trading day.

IT systems and interfaces in the spotlight
Technically, T+1 requires a review and adjustment of the system architecture in almost all institutions. Trading platforms, settlement software, reporting tools, interfaces to clearing and the central securities depository (CSD) must be aligned with the new schedule. Internal processes such as cash management, securities lending, corporate action processes and compliance reporting must also be adapted.

Especially in an international context (e.g. for transactions with US counterparties), the synchronisation of time windows and deadlines becomes a challenge. Seamless integration with global settlement systems (e.g. CLS for foreign exchange settlement) and European access to the pan-European settlement system T2S play a key role here.

Reorganising liquidity and risk management

For banks, T+1 also brings with it changed requirements in liquidity management. Payments must be available one day earlier, and the time available for financing via repo or FX transactions will be shorter. This can lead to an early need for intraday liquidity. On the other hand, the shortened cycle reduces the number of open positions and therefore the level of counterparty risk and collateral requirements (margins).

For centrally cleared transactions, this means potentially lower initial and variation margins, which ties up capital and increases the efficiency of risk management. Exposure to market volatility between trade conclusion and settlement is also significantly reduced – an advantage for all parties along the value chain.

Impact on customers and end investors
Communication with institutional and private customers must also be adapted. Investors receive proceeds faster, but purchase amounts must also be available earlier. Custodian banks and custodians must revise corresponding deadlines, value dates and settlement processes in customer service. Contractual conditions relating to settlement cycles (e.g. for funds, securities lending or derivatives) must also be reviewed and updated if necessary.

Conclusion: Effort with strategic potential
The switch to T+1 requires considerable investment in IT, process design and training. At the same time, it offers the opportunity to eliminate existing inefficiencies, sustainably reduce operational risk and make European capital markets more competitive globally. Institutions that start early with the implementation will not only benefit from compliance advantages, but also from a modernisation boost for their own post-trade architecture.