T+1 Settlement: Preparing for the future of European financial markets

The European Securities and Markets Authority (ESMA) has proposed to shorten the settlement cycle for financial transactions in the European Union from two business days (T+2) to one business day (T+1), with implementation scheduled for 11 October 2027. This initiative aims to enhance market efficiency, reduce counterparty risk, and improve liquidity. The EU move to T+1 will significantly reduce the time available to perform the activities required to achieve a successful settlement by the intended settlement date.

_{Diagram 1: Simplified overview of current T+2 settlement cycle, based on current protocols and on current T2S settlement schedule
Source: ESMA}

_{Diagram 2: Simplified overview of a possible T+1 settlement cycle, based on current protocols and on the current T2S settlement schedule. 
Source: ESMA}

Several jurisdictions have already adopted or are planning to transition to T+1 settlement:

• The United States, Canada, Mexico, and Argentina implemented T+1 settlement in May 2024.
• The United Kingdom and Switzerland have announced plans to move to T+1 settlement on 11 October 2027, in alignment with the EU timeline.

To ensure a smooth transition to T+1 settlement, firms should familiarise themselves with recommendations made by industry associations coordinated at European level (i.e. EU T+1 Coordination Committee¹).

In line with the expectations expressed in the ESMA report, firms should finalise the definition of their solution for the technical and operational challenges that T+1 settlement will pose and then start to implement the changes required to ensure that activities and processes can be completed in due time to ensure a successful transition to T+1 settlement. This can include operational systems and internal processes review and upgrade, organisational and budget considerations, arrangements with third party providers and counterparties. Furthermore, firms are recommended to allocate sufficient time before the go-live of T+1 in the EU to perform relevant testing activities (including allocation, confirmation and matching on T+0).

The CSSF may have discussions with firms and trade associations to understand firm preparedness, including how their activities are aligned with the initiatives of the industry task forces established at European level by the EU T+1 Coordination Committee.

Examples of steps and activities to be executed in the preparation of the T+1 implementation include:

Firms should conduct a comprehensive review of front-to-back trade processing, including:

• Trade execution and confirmation: ensure trades are executed, matched and confirmed more quickly to align with the shorter settlement cycle.
• Clearing and settlement operations: adjust operational workflows to accommodate T+1, including trade affirmation and allocation processes.
• Custody and asset servicing: ensure custodian banks can support T+1 settlement and adapt to changes in corporate actions and reconciliations.
• Collateral and margin management: assess the impact on collateral movements and margin calls due to the reduced settlement timeframe.

Ensure that internal systems can handle the shortened settlement cycle and implement necessary technology updates, including:

• Real-time trade processing capabilities.
• Automated trade matching and affirmation systems.
• Enhancements to post-trade reconciliation and reporting.

Ensure that staff is able to perform the activities within the new timeframe. Evaluate whether internal organisation needs to be reviewed and improved. Provide staff training on the new T+1 procedures and timelines, with a focus on:

• Compliance teams adapting to new requirements.
• Operations teams streamlining trade matching and settlement processes.
• Portfolio managers adjusting execution strategies e.g. to ensure liquidity.

Ensure that counterparties and service providers are able to perform their activities within the new timeframe. Evaluate whether the working arrangements with external parties need to be reviewed and changed.

• Work closely with brokers, custodian banks, and financial market infrastructures to ensure readiness for T+1.
• Review service-level agreements to align with faster trade settlement requirements.

• Adjust cash management strategies to accommodate faster settlement obligations.
• Ensure funding and treasury teams have processes in place for accurate cash forecasting.

The shift to T+1 settlement represents a major milestone for European financial markets, enhancing efficiency and reducing risk. The EU move to T+1 is an opportunity to review and modernise systems and processes. Businesses must begin preparations now to ensure a seamless transition and capitalise on the benefits of a shorter settlement cycle.