In a bid to revitalize its capital markets and attract both domestic and international investment, the European Commission confirmed that the EU will shift from a T+2 to a T+1 settlement cycle starting October 11, 2027. This change is expected to enhance the attractiveness of EU markets by speeding up the process of matching and legally transferring securities between buyers and sellers.
Rationale Behind the Transition
The move to a single-day settlement is designed to mitigate risks associated with trade failures and to reduce the margin requirements that market participants currently face. Maria Luís Albuquerque, the EU commissioner for financial services, explained that a shortened settlement cycle would not only lower costs but also streamline operations in the EU’s financial markets. By aligning its practices with those already adopted in jurisdictions such as the UK, Switzerland, and the US, the EU aims to avoid potential competitiveness gaps that may arise from differing settlement timelines.
Expected Benefits for Market Participants
A faster settlement process is anticipated to unlock several benefits for the financial sector. Shortening the settlement cycle can lead to a significant reduction in margin requirements, thereby freeing up capital for trading and investment. In addition, the transition is projected to reduce operational risks and lower the costs incurred when transactions do not align with the global standard. These benefits are particularly important in today’s fast-paced trading environment, where technological advancements have increased the velocity of transactions and market activities.
Aligning with Global Trends
The decision follows a broader global trend toward expedited settlement cycles. Last year, the US Securities and Exchange Commission shortened its settlement period, while other markets including Canada, Mexico, and India have already moved to T+1 settlements. China set the pace by adopting a T+1 framework in 2022. The EU’s adoption of a similar model is seen as a necessary step to harmonize its market operations with these international developments and to avoid the misalignments that can hinder cross-border trading.
Implementation and Next Steps
The proposed change, which was endorsed by the European Commission and is consistent with recommendations from the EU’s financial market regulator ESMA, will require approval from EU member states and the European Parliament before it can take effect. The decision has garnered support from several quarters, with the UK government also considering a similar transition by proposing the same effective date for its markets. As financial markets continue to evolve, further moves toward even shorter settlement periods potentially down to same-day (T+0) settlements are being discussed globally.
