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AFME calls for industry discussion on shortening settlement cycles in Europe
A new paper discusses the pros and cons of a oneday settlement cycle in Europe , a topic the industry seems to be reluctantly accepting is on the horizon .
The Association for Financial Markets in Europe ( AFME ) has published a new paper discussing whether Europe should move to a one-day settlement cycle , weighing up the benefits and hurdles of a reduction . With the US planning a move to T + 1 over the next two years , the conversation has naturally shifted to Europe and whether it needs to make a similar transition . Europe moved from T + 3 to T + 2 in 2014 , while the US made the same move in 2017 . However , the complexities around the European markets – a multitude of currencies , market infrastructures , and distinct legal frameworks – mean there is much more to consider when it comes to moving to T + 1 than in the US . Conversations over the past 12 months in Europe have seen few industry participants back a shift to T + 1 in the immediate future , with multiple concerns voiced around operational readiness and an emphasis on focusing on existing problems around regulations – such as CSDR – and the T2S system . AFME ’ s paper intends to provide some initial reflections on two major questions : should Europe move to T + 1 ? And if so , how can this be achieved ? Within its answers are a mix of benefits and barriers . The benefits AFME highlighted included : a reduction of risk , a significant reduction of associated costs and the maintenance of global alignment . Subsequently , the association said it supports a cautious approach and called for detailed assessment of risks and benefits . “ An industry move to T + 1 would follow the historic trend towards shorter settlement cycles , and could result in reduced market risk and associated costs ,” said Pete Tomlinson , director of post-trade at AFME . “ However , a move to T + 1 could be the most challenging migration yet because it would remove the only business day between trading and settlement , creating significant pressure on post-trade operations , particularly for global participants .
“ The barriers to timely settlement in the current model need to be fully understood and addressed before Europe can move to T + 1 . A rushed or uncoordinated approach is likely to result in increased risks , costs and inefficiencies , particularly given the unique nature of European markets which have multiple different market infrastructures and legal frameworks . For this reason , AFME is calling for an industry task force to be set up to conduct a detailed assessment of the benefits , costs and challenges of T + 1 adoption .” Settlement has been a huge topic over the past 24 months within Europe , with fail rates notably high and the CSDR regulation landing – enforcing reporting requirements and penalties on market participants for failed trades . Given these ongoing issues and the previous pan-European settlement system rollout taking up the best part of a decade , experts have often aired frustration when prompted to discuss the notion of now reducing settlement times on the continent . Issues around corporate actions , cross-border actions and foreign exchange have been highlighted in the past , but the operational challenges are often the biggest drawback to such a move , along with co-ordinating so many countries . AFME has called for a taskforce to be established to explore the shift to T + 1 , which is an inevitable move ; however , it seems this debate could go on for some years with an air of frustration on the side of market participants .
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