T+1: The new US rules are causing distress in arbitrage in Europe


From 28 May 2024, the US standard settlement cycle for most broker-dealer transactions in securities will be shortened to 1 business day after the trade date (T+1).

The transition involves a change that will have significant impacts for all types of investors, including European ones, who operate in American securities with significant consequences on some operations – just think about recall operations. The US has accelerated, not coordinating with Europe where the new standards are expected to come into force in 2026. From an operational point of view, this misalignment will create quite a few issues for arbitrageurs who, in the best-case scenario, will have to take on substantial investments in IT to cope with the two-year delay. Paola Deantoni, Public Affairs Officer of Societe Generale Securities Services Italy, is one of the leading experts in European market regulation.

What are the advantages of switching to T+1?

Moving to T+1 certainly has many facets. On the risk side, there is an advantage because the counterparty risk is reduced by a day: instead of two days of risk there is only one. Some consider it an aspect of further risk, above all because it requires very accelerated timing in all operational processes and therefore requires an investment in the IT part because currently, without this enhancement, we cannot consider speeding up the actual process. The move to T+1 also allows for a much more standardised aspect in the management of negotiation confirmations, processes and activities of the items to be sent.

Is there increased risk for Forex?

There are riskier aspects linked to Forex, and many are exposing themselves to this because one of the platforms highly advertised by the world of funds to reduce the risk of foreign exchange settlement is the Continuous Linked Settlement or CLS, which – in its current set up – is not compatible with a transition to T+1 but only with the current T+2. This is why some players, such as the buy side, believe that the transition to T+1 brings more risks than benefits. The entire regulatory universe is very inclined towards the T+1 transition in Europe. In recent months, there was a conference at European level where Commissioner Mairead McGuinness, in her speech, said "it is not a question of if, it is a question of when" regarding the transition to T+1 in Europe too, precisely to avoid having open counterparty risk.

When do you think this transition will take place?

We do not have precise dates; what was said was that we were positioning ourselves towards the end of 2026.

Will the misalignment create issues for arbitrageurs?

Let's typically take Apple, one of the most capitalised stocks in the world: it is listed in the United States, on Xetra (Germany), as well as in Italy. An obviously high-level operator can carry out arbitrage, i.e., purchase American securities through a European trading venue and resell on the main US stock exchange (or vice versa). The reason for this type of operation is linked to the economic opportunity provided by the difference in prices between the two markets. This is certainly a respectable and legal practice, but post trading in this case must be efficient to support cross-border operations between one CSD1 and another. Among the points of attention to guarantee the timely success of the regulation are the contents of the instruction, which must be complete and machine readable, i.e. interpretable by machines. In fact, the risks of late settlement (failing transaction) are elements that can also make arbitrage less interesting.

So, will T+1 condemn arbitrage?

In reality, it could also make it easier, as long as the arbitrageur is highly computerised: he or she must have a substantial back-office structure, and absolutely must have a machine that works very well.

What will the practical implications be?

In my opinion, there will be a big increase in requests for significant computerisation. In the end, the implementation was decided by the United States and we, in Europe, must ensure that there are no major discrepancies to manage for all the years during which we will not yet be aligned with the US.

Is someone working towards an alignment of at least American securities listed in Europe?

Players’ associations, CSDs and stock exchanges are evaluating how to align themselves in Europe too, at least for American securities, immediately. Otherwise, a series of issues will arise and will need to be managed during the time of regulation, during the time of release of transactions and in American taxation. The stock exchanges want the ex-date, the identical cut-off day to guarantee arbitrageurs and price transparency, but if we guarantee the ex-date, it means that all operations carried out on a given day will have to be adjusted (generating market claims), and I’m sure you can imagine the number of transactions involved!

Interview published in Milano Finanza in March 2024.

1 - CSD: Central Securities Depository