European financial markets could face significant challenges, including an uptick in failed trades and a reduction in liquidity, if they decide to adopt a faster settlement cycle similar to the US, as per feedback from the investment community to regulators. This comes amid discussions on reducing the trade settlement period to T+1, half the current duration.
The investment sector's apprehensions were voiced in a series of responses to the European Securities and Markets Authority (ESMA), highlighting the potential disruptions a shift to T+1 could cause. The US is set to transition to this quicker settlement timeframe in May, with calls for Europe to consider a similar move.
Concerns raised include the operational impacts of such a shift, with a strong demand for clear regulatory guidance and industry coordination. The anticipated increase in settlement failures and the potential strain on liquidity were among the key issues highlighted. Market makers, in particular, may find it challenging to provide liquidity for securities they do not currently hold.
The German Finance Agency expressed worries about the repo market for German bonds, emphasizing the necessity for seamless integration between cash, repo, and futures markets to maintain liquidity. Any disruption could detrimentally affect the attractiveness of European financial markets to international investors.
Various national and regional entities have also voiced their concerns. For instance, Finance Finland fears that the move to T+1 could limit Finnish investors' access to non-EU markets due to the unprofitability of extended trading hours. The Federation of the Belgian Financial Sector and the European Central Securities Depository Association pointed out the challenges of compressing post-trade activities into shorter timeframes. The Italian Banking Association noted that major market participants might have to adjust working hours, a change that could be impractical for smaller institutions.
French bank Societe Generale SA anticipates a shift to later working hours, potentially leading to the offshoring or outsourcing of teams, possibly to the US. Moreover, the transition to T+1 in Europe is expected to be more complex and costly than in the US, given the EU's fragmented capital market landscape, as highlighted by Citibank Europe Plc, a division of Citigroup Inc.
