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Afme urges caution on European move to T+1

Afme urges caution on European move to T+1

A move by Europe to a one-day settlement cycle (T+1) could bring significant benefits but would face a host of barriers, cautions a paper from Association for Financial Markets in Europe (Afme).

In Europe, the current settlement cycle for most transactions in equities and fixed income markets is two business days but with the US recently deciding to move to T+1, Afme has set out what it considers the pros and cons of a switch.

A shorter settlement cycle would reduce counterparty, market and credit risk, as well as slash costs and help to maintain global alignment.

But, the paper cautions, there are several barriers to overcome before such a migration can take place.

A switch to T+1 would slash the time available for post-trade operations from 12 hours to two, says Afme. In addition, the move could lead to an increase in settlement fails and increase operational complexities for global participants in different time zones.

There would also be a securities lending impact, compressing the timeline to identify and recall securities, which could lead to breaks in the process, resulting in an increase in settlement fails and cash penalties.

Pete Tomlinson, director, post trade, Afme, says: said: "The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T+1. A rushed or uncoordinated approach is likely to result in increased risks, costs and inefficiencies, particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks.

"For this reason, Afme is calling for an industry task force to be set up to conduct a detailed assessment of the benefits, costs and challenges of T+1 adoption."

Read the paper:Download the document now 1.8 mb (Chrome HTML Document)

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