Oct 3, 2014

The move to T+2 in Europe is a market initiative of unprecedented scope. The level of market awareness and preparedness is surprisingly low. Without changes to procedures, technology, controls and reconciliations the impact to firm’s operational resources and risks could be tremendous.

What is happening?

The standard settlement period for securities in Europe is shortening from Trade Date plus 3 days (T+3) to Trade Date plus 2 days (T+2). Counterparties will have one less day to complete the pre-settlement stages of the trade lifecycle. T+2 will be mandatory for trades executed on Exchange and Trade Facilities. While it is considered best practice, T+2 settlements will not be mandatory for off-facility exchanges (OTCs). The changes will extend beyond Europe, with cross-border securities transactions also being subject to T+2 requirements.

When is it happening?

As of 6 October 2014, 24 markets, including the UK and Ireland, will move to the shorter settlement cycle.

Why is it happening?

The move to the shorter settlement cycle is part of the The Central Securities Depositories Regulation (CSDR), which came into force on 17 September 2014, and Target2Securities (T2S) the European Central Bank’s (ECB) new settlement engine, which will take effect from June 2015.

The objective is to reduce counterparty, market and liquidity risks. Requiring the exchange of assets and cash on a shorter timeline will reduce the risk of counterparty default and failed trades. There will also be one day fewer for margin calls, and the reduction in annual collateral requirements will free up capital for further investment.

What do you need to do?

Market participants will have to adapt their operational procedures, to include same day matching and affirmations, in order to complete the pre-settlement stages of the trade cycle on a shorter timeline. This will require a more efficient exchange of information between counterparties, increased automation of operational processes, and the streamlining of business as usual (BAU) practices. In the early days additional reconciliations and break clearance teams will be required.

What happens if you are not ready?

Trades that fail to settle on T+2 will incur a fine and may increase operational risk.

The complexities associated with scheduling a multi-market go-live with financial institutions are a logistical and systematic challenge. However, the reduction and harmonisation of settlement periods will ultimately lead to greater end-to-end operational efficiency, and work toward reducing overall systemic risk.

For further information contact stuart.mcclymont@jdxconsulting.com or kirsten.hall@jdxconsulting.com