Accelerated Settlement Cycles in Europe: An Overview

Accelerated Settlement Cycles in Europe: An Overview

The discussion around moving towards accelerated settlement cycles in Europe sparks a myriad of questions: What are the potential benefits and risks? Is it a journey Europe should embark on, and if so, when?

Historically, Europe has made significant strides in evolving its settlement cycles, particularly within its complex and historically fragmented infrastructure. Thanks to initiatives led by EU regulatory bodies, such as the wide-reaching CSDR regulation, Europe has achieved a significant level of harmonisation with the current 2-day settlement cycle (T+2). However, this isn’t to say that Europe is not still a heavily complex infrastructure landscape. Further reducing settlement cycles introduces a considerable challenge, raising the question: Do the long-term benefits outweigh the short-term risks?

The Regulatory Perspective

On January 25th, European Commissioner Mairead McGuinness highlighted in her keynote speech that the question is not if Europe will transition to shorter settlement cycles, but rather how and when. This acknowledgment underlines the critical role of financial markets in bolstering a healthy economy, further emphasised by the interconnectedness of regional and global markets, including the European Economic Area, Switzerland, and the UK.

The Americas are leading the charge toward T+1 settlement cycles, with the United States, Canada, and Mexico set for this transition by late May 2024. Following suit, Latin American countries like Chile, Colombia, and Peru have announced similar moves for 2025. Moreover, India is setting an ambitious goal with the possibility of T+0 settlements by the end of March 2024, aiming for instantaneous settlements by 2025.

Europe stands firm in its commitment to continuous engagement with industry associations and key markets. This approach aims to glean insights from North America’s T+1 transition and explore coordinated strategies for the future. The essence of Europe’s strategy lies in cautious, incremental steps towards shorter settlement cycles, ensuring safety and stability for the future transition.

The Role of Technology and Standardisation

Technology stands ready to support the shift towards shorter cycles, yet achieving this safely hinges on further standardisation of practices, industry coordination, and revised market processes. As settlement cycles reduce, the demand for changes in market infrastructures and supporting technology grows.

The integration of real-time processing capabilities, as emphasised by Torstone’s commitment to moving away from dated, batch-based technologies, highlights the necessity for systems that can manage and settle trades efficiently within the shortened cycle. This transition is a call to action for the industry to invest in technologies that ensure trades are processed in a ‘ready-to-settle’ state by the end of the trading day, thus mitigating risk and enhancing market resilience.

The emergence of Distributed Ledger Technologies (DLT) and Central Bank Digital Currencies (CBDC), in time, is poised to play a pivotal role in achieving atomic settlements within a secure and resilient ecosystem.

Balancing Benefits and Challenges

Accelerating settlement cycles presents a promising avenue for enhancing efficiency and competitiveness within financial markets. However, this journey is fraught with significant challenges that necessitate careful management to ensure a smooth transition. Collaboration, innovation, adherence to established standards, and effective risk management are paramount in moving towards shorter settlement cycles in Europe, ensuring minimal disruption and maintaining market stability.