Settlement

The UK Taskforce and ESMA have advanced in lockstep in their work on shortening the settlement cycle to one day. In a final report published in mid-November, ESMA recommended moving to T+1 by October 2027, aligning its schedule with the UK’s proposed implementation date.

AMAFI’s primary areas of focus are the following:

• Governance. ESMA is recommending that governance be led by pan-European participants. This raises the issue of accommodating the unique features of domestic markets. In France, these include registered shares, the deferred settlement service, and matching and settlement services managed by Euroclear France. Marketwide coordination will be required to manage the project nationally in a manner consistent with European governance arrangements.
• Challenges for individual markets. T+1 settlement poses significant challenges to certain markets, including those in government bonds, corporate bonds, securities lending and exchange-traded funds (ETFs), all of which will have to change their ecosystems to handle T + 1 without undermining liquidity (AMAFI / 24-76). Although ESMA recognises the need for in-depth analyses in some segments, it is reluctant to temporarily adjust the penalty mechanism for settlement fails set forth in the Central Securities Depository Regulation (CSDR). In AMAFI’s view, however, participants need flexibility to be able to respond effectively if liquidity dries up.
• Changes to the penalty regime. In the final report that it recently published following a consultation on the CSDR review in December 2023 (AMAFI / 24-74), ESMA recommended increasing penalty rates for bonds (excluding those issued by small and mid-sized firms) and ETFs. AMAFI views this measure as an unwelcome step if it is intended to be implemented before the switch to T + 1. This is particularly true since the European penalty mechanism has no equivalent, either in the United States – which has successfully managed the transition without such guardrails – or in the United Kingdom.