15 November 2023
European and UK stock markets are under intense pressure, with their US counterparts already testing T+1 trade settlement. While switching from T+2 to T+1 may seem like a non-event to many people, it has enormous repercussions for the UK market and further afield. We already know that the eventual switch to T+1 by European markets will happen, but on a very different timetable.
If we look back to the 1980s, the infamous "Big Bang", there was a revolution in the stock market, personal investment, electronic training and settlement systems. At the time, T+10 settlement felt like something of a revolution, but the ongoing switch to T+1 and, eventually, T+0 are in a different league - the concept behind enhancing trade settlement is simple: greater efficiencies across stock markets.
In a demonstration of the influence of the US markets, when the US SEC began discussing T+2 settlement in 2017, global markets were forced to follow soon. The issue of T+1 settlement was discussed in earnest in 2022, with open discussions in 2023 before the testing period, which began on 14 August. The change in settlement times is expected to go live in May 2024, at a time when European and global counterparts will still be in relatively early discussions.
UK and EU counterparts are still in the "evidence gathering" stage, and any switch to T+1 is unlikely before 2025. Consequently, this will lead to global settlement systems working on different timescales for a while, which could be a matter of months or even up to a year.
If we put the political and practical challenges to one side, there are several potential benefits from the switch to T+1 settlement. These include:-
· Risk reduction
· Reduced associated costs
· Enhanced liquidity
Unfortunately, there are also some issues which could impact efficient trade settlement and potentially upset markets, such as:-
· Compressed settlement periods
· Different time zones
In theory, the switch from T+2 to T+1 appears to halve the settlement period, but in reality, it is estimated to fall to 83%, from 12 down to 2 hours.
There are also significant wider repercussions taking in a range of different associated activities such as:-
· Stock lending
· Listed/OTC derivatives
· Collateral processing
· Foreign exchange
· Cash borrowing
· Corporate actions
Aside from the challenges of changing the settlement system to T+1, an issue with any of the above topics (especially considering the reduced timescale) could significantly increase trade settlement failures.
There is no doubt that the US markets are the global leaders when it comes to actual trading and dictating settlement changes. To put this into context:-
· 46% of global equity trading occurs in the US
· International investors own 40% of corporate US value
· In 2021, foreign share purchases in the US hit a staggering $30 trillion
These figures show the power of the US market but also the need for global markets to work together to maintain trade settlement efficiencies.
Ironically, while discussing a move to T+1 with market operators, the EU and UK are also considering a move to T+0, same-day settlement of transactions. While many experts believe this will eventually happen, with the technology available, even a simple issue, such as different time zones, could create serious problems. Maybe a move to T+1 is a step too far just now?
As we have seen with many other settlement issues, such as the EMIR Refit, global markets rarely move in the same direction simultaneously. While the proposed switch to T+1 has been on the cards for some time, it is now time for the EU and the UK markets to look at the practical challenges. Once the US moves onto this new settlement system, whether we like it or not, EU and UK markets must follow suit.Back to News