The European Union (EU) is actively contemplating a move to reduce the settlement time for stock trades from T+2 to T+1, according to Mairead McGuinness, the EU financial services commissioner. This comes in response to the upcoming shift by Wall Street, slated for May 28, which will reduce stock trade settlement times from two business days to one. Canada and Mexico are also set to adopt similar changes. McGuinness emphasized that the shift in the EU is not a matter of if but when, as the advantages of quicker settlement times are expected to outweigh short-term challenges.
The move to T+1 aims to enhance market efficiency, increase trading volumes, and reduce the need for collateral to back trades. While McGuinness acknowledged the complexity of this transition, especially considering the fragmented nature of EU stock trading, she highlighted that the benefits justify the effort. She suggested that a “political steer” would be required to navigate this transition successfully.
Given the interconnectedness of financial markets in the EU with those in non-EU countries, including the UK, McGuinness emphasized the importance of coordinating the timing of the shift to T+1. Maintaining an “open dialogue” with the UK, which is also considering T+1, is crucial. The EU is open to synchronization efforts with other jurisdictions to ensure a smooth transition.
Gary Gensler, Chair of the U.S. Securities and Exchange Commission, expressed confidence that the EU, the UK, and Switzerland would eventually adopt T+1 later this decade. He encouraged global discussions among central banks on moving forex transaction settlements from T+2 to T+1, emphasizing the importance of time in managing risks and costs.
Stephan Leithner, a member of Deutsche Boerse’s executive board, welcomed McGuinness’s clarification on the EU’s response to Wall Street’s move. While acknowledging the technical feasibility of T+1, Leithner cautioned against it becoming a distraction from the EU’s broader efforts to develop a more robust capital market. He stressed the necessity of cooperation with the UK and Switzerland for a successful transition.
The European Securities and Markets Authority (ESMA) has already conducted a public consultation on T+1, revealing mixed opinions on its desirability. ESMA is expected to report its findings by the end of the year. European investors have expressed concerns about the May transition, fearing they may not have sufficient time to secure dollars for U.S. stock transactions. FX settlement system CLS Group CEO Marc Bayle advised investors to be prepared, urging them to conduct necessary testing ahead of the impending changes.
