The road to T+1 is not without challenges

With the right vision and targeted investment, what looks complex today can unlock efficiencies tomorrow.

Some background

The European Securities and Markets Authority (ESMA) has decided to shorten the settlement cycle for financial transactions in the European Union from two business days (T+2) to one business day (T+1), with implementation scheduled for 11 October 2027. This initiative aims to enhance market efficiency, reduce counterparty risk, and improve liquidity. The EU move to T+1 will significantly reduce the time available to perform the activities required to achieve a successful settlement at the intended settlement date.

Context

Several jurisdictions have already adopted or are planning to transition to T+1 settlement:

• The United States, Canada, Mexico, and Argentina implemented T+1 settlement in May 2024.
• The United Kingdom and Switzerland have announced plans to move to T+1 settlement on 11 October 2027, in alignment with the EU timeline.

PREPARING THE TRANSITION

To ensure a smooth transition to T+1 settlement, firms should familiarize themselves with recommendations made by industry associations coordinated at European level (i.e. EU T+1 Coordination Committee1).

In line with the expectations expressed in the ESMA report, firms should finalize the definition of their solution for the technical and operational challenges that T+1 settlement will pose and then start to implement the changes required to ensure that activities and processes can be completed in due time to ensure a successful transition to T+1 settlement. This can include operational systems and internal processes review and upgrade, organisational and budget considerations, arrangements with third party providers and counterparties. Furthermore, firms are recommended to allocate sufficient time before the go-live of T+1 in the EU to perform relevant testing activities (including allocation, confirmation and trade matching on T+0).

The regulators are having discussions (mainly through local Governance meetings regularly held) with firms and trade associations to understand firm forward planning, including how their activities are aligned with the initiatives of the industry task forces established at European level by the EU T+1 Coordination Committee.

Examples of steps and activities to be executed in the preparation of the T+1 implementation include:

PROCESSES ASSESSMENT
Firms should conduct a comprehensive review of front-to-back trade processing, including:

• Trade execution and confirmation: ensure trades are allocated and confirmed and trade matching processed as soon as possible after their execution to align with the shorter settlement cycle.
  SSI: there is a common agreement among different EU T+1 working groups to set up a task force of experts including representatives from SWIFT -  SMPG¹ -ISITC² -FMSB³- SEG 2002⁴ – industry committee representative. The task of the above-mentioned expert group is the definition of a standardised content for the management and exchange of Standard Settlement Instructions (SSIs) meaning  data elements to be included in the template, with categorisation between mandatory and optional including timing for the exchange or updates of SSIs.
  The agreement must be reached to establish a standard rule and content by all stakeholders across all EU, UK and CH markets. Standards must be in line with possible automated exchange of data elements (carrier agnostic).
• Clearing and settlement operations: adjust operational workflows to accommodate T+1, aligned with trade affirmation and allocation processes and timing.
• Custody and asset servicing: ensure custodian banks can support T+1 settlement and adapt to changes in corporate actions and reconciliations with a special focus on corporate actions on flow including possible offer by EU CSDs of automatic buyer protection. 
• Collateral and margin management: assess the impact on collateral movements and margin calls due to the reduced settlement timeframe.
• Lending and borrowing: Set the return notification deadline for recalled securities at 30 minutes before the return settlement deadline on T+1 as a best practice approach. Promotes communication from the borrower to lender giving lender insight if return is sufficient or short creating engagement for resolution of cash market sale. Set the return settlement deadline for recalled securities at 30 minutes before the T2S Delivery versus Payment (DvP) cut-off on T+1enables lender delivery into cash markets after securities have been returned. Additionally, clearly separates recall deadline (lender responsibility) return timeframes (borrower responsibility).

IT  ENHANCEMENT
Ensure that internal systems can handle the shortened settlement cycle and implement necessary technology updates, including:

• Real-time trade processing capabilities.
• Automated trade matching and affirmation systems.
• Enhancements to post-trade reconciliation and reporting.

STAFF AND ORGANISATION
Provide staff training on the new T+1 procedures and timelines, with a focus on:

• Compliance teams adapting to new requirements.
• Operations teams streamlining trade matching and settlement processes.
• Portfolio managers adjusting execution strategies, e.g., to ensure liquidity. 

Thanks to the regular update on the status of the project and related challenges to overcome, we will ensure that staff will be able to perform the activities within the new timeframe. Evaluation of whether internal organisation needs to be reviewed and improved is also an option to consider. More likely, follow-up from the employees after the training can inspire the management to reconsider the actual organisation.

COORDINATE WITH COUNTERPARITIES AND SERVICE PROVIDERS
Ensure that counterparties and service providers can perform their activities within the new timeframe. Evaluate whether the working arrangements with external parties need to be reviewed and changed.

• Work closely with brokers, custodian banks, and financial market infrastructures to ensure readiness for T+1.
• Review service-level agreements to align with faster trade settlement requirements.

MANAGE LIQUIDITY

• Adjust cash management strategies to accommodate faster settlement obligations.
• Ensure funding and treasury teams have processes in place for accurate cash forecasting.

Conclusion

The road to T+1 is not without challenges.

But with the right vision and target investments, what looks complex today can unlock real-time efficiencies tomorrow.

The shift to T+1 settlement represents a major milestone for European financial markets, enhancing efficiency and reducing risk. The EU move to T+1 is an opportunity to review and modernise systems and processes. Businesses must begin preparations now to ensure a seamless transition and capitalise on the benefits of a shorter settlement cycle.

Paola Deantoni, Senior Advisor, Public Affairs, Société Générale Securities Services

¹ Securities Market Practice Group
² ISITC brings together asset servicers, broker/dealers, asset managers/owners, solution providers and other industry professionals to develop standards that are designed to enhance efficiencies in trade processing and related communications.
³Financial Markets Standards Board
⁴ Securities Expert Group