EU plans move to shorter trade settlement times in 2027

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EU financial markets look set to make the long-awaited move to reduce trade settlement times in 2027, a step that would align them with the UK’s timetable, after the US made the transition earlier this year.

In an industry consultation run by the European Securities and Markets Authority on Wednesday, 70 per cent of attendees said they favoured a move in the final quarter of 2027, with the start and end of 2028 also being considered by officials and industry executives.

The EU’s discussion on settlement times comes after the US in May shortened the window for finalising trades in an attempt to modernise markets, increase liquidity and minimise the risk of failed trades.

Settlement is the typically mundane but crucial process of matching and legally transferring assets from sellers to buyers. Outside of North America and India, it typically takes place over two days.

The activity was thrust into the spotlight during the US meme stock mania at the peak of the coronavirus pandemic, when some brokers including Robinhood blamed the two-day settlement window for their systems being unable to keep up with the volume of trading. 

Subsequently, the US, Canada and Mexico made the move from two-day to so-called T+1 settlement for stocks, bonds and exchange traded funds. The UK is also exploring moving to one-day settlement by the end of 2027, while India cut its settlement time last year.

Sebastijan Hrovatin, a senior official at the European Commission, said during the consultation that late 2027 would be “realistic,” adding: “I don’t think it’s too much of a stretch.”

Investors had worried that US securities’ settlement times being out of step with the rest of the world would lead to a surge in the number of failed trades, but the US transition has been smooth.

On the first day after the US’s move, trades of US securities failed at a rate of 1.9 per cent, according to the Depository Trust & Clearing Corporation, slightly lower than the May average of 2.01 per cent for T+2 settlements.

Jesús Benito, head of domestic custody and trade depository, at Switzerland’s SIX exchange, said Europe’s target for the end of 2027 “is achievable”. He added that “the agreement from the panellists that it is preferential to have unity between the EU, Switzerland and the UK on the timing for this move is very positive”.

The EU’s transition is expected to be more complicated, however, given its fragmented capital markets.

The move to T+1 was spearheaded by Gary Gensler, chair of the Securities and Exchange Commission, who has also called for settlement times in global currency markets to be shortened, arguing that it would reduce market risk.

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