Fund managers urge European regulators to mirror US move to T+1

Asset managers have warned of a “major and serious risk” to European capital markets if regulators do not copy the US and cut settlement cycles to one day.

Europe’s markets watchdog is considering whether to shorten EU settlement cycles following a move in the US to cut the current two-day settlement time for US equities and corporate bonds, a process known in the industry as T+2.

The US move from T+2 to T+1, which comes into effect in May, has caused concern among EU fund managers as it will reduce the amount of time they have to settle US trades.

The European Securities and Markets Authority launched a call for evidence last year on whether EU markets should also move to T+1.

This article was previously published by Ignites Europe, a title owned by the FT Group.

In a response to the Esma call for evidence, the European Fund and Asset Management Association said there was “a compelling case” for the EU to move to T+1.

“There is a major and serious risk that if Europe fails to act, other jurisdictions will follow the US while Europe remains on T+2 for a prolonged time,” Efama said. “European capital markets would be behind their peers in terms of capital efficiency and risk management.”

Efama added that “a timely transition” to T+1 in the EU should be done in lockstep with the UK to avoid creating further settlement misalignment.

Michael Pedroni, head of ICI Global, the asset management trade association, added that EU policymakers should “decide in early 2024 to commit to move to T+1 settlement [and] communicate a clear 24-30 month path to implementation”.

“Acting expeditiously will help minimise the duration of misalignment with the North American markets,” he said.

Pedroni said EU policymakers should work with authorities in the UK and Switzerland to ensure a co-ordinated move to T+1 across Europe.

The BVI, the German fund industry trade association, added that it also “supports shortening the settlement period for securities from two days to one”.

“Reducing the settlement period would be a necessary step towards harmonising the EU capital markets with the US,” the BVI said.

It added asset managers would require “a reasonable timeframe” to test their systems ahead of implementation for a move to T+1 in Europe.

Some industry groups are less enthusiastic about a potential move to T+1 in Europe.

The Association of the Luxembourg Fund Industry said moving to T+1 would “not generate any direct benefits for asset managers”.

Alfi said EU firms would “need a minimum of four years” to adjust to T+1 following the US move to deal with operational issues arising from the switch.

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“A reduction of the settlement cycle would probably have a limited effect on large players that have the resources to minimise impacts and probably harm negatively smaller players,” said Alfi.

Efama also cautioned that remaining on T+2 might be more suitable for cross-border ETFs and Ucits funds “held by non-EU investors in time zones where a shorter settlement cycle would increase errors”.

A move to T+1 could also lead to further consolidation in the asset management industry, according to Efama, as “larger asset managers are simply better equipped to make major investments in systems which will be recouped fairly quickly”.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.