Following the United States’ footsteps, which adopted a shorter settlement cycle (T+1) for securities in May 2024, the European Union and the United Kingdom have begun in-depth discussions on a similar reform.

In the third quarter of 2024, ESMA recommended switching to a T+1 settlement cycle starting from October 11, 2027. After the establishment of a European governance, the next two years will allow market players to identify the necessary operational adjustments and begin implementing them. The AFG is actively involved in these discussions and welcomes the desire for modernization, while highlighting the operational and regulatory challenges for management companies, particularly smaller ones. 

The AFG highlights in its paper five key messages for asset management, in line with the recent recommendations of the “EU T+1 Industry Committee”.

•    Maintain flexibility on fund liabilities: managers must be free to decide whether or not to reduce their funds’ liabilities. The operational chain must adapt accordingly, in particular through enhanced dialogue ;

•    Maintain flexibility on the ETF primary cycle: managers must also retain flexibility on the settlement cycle of their ETFs primary market (creation/redemption of ETFs shares between the ETF issuer and authorized market participants), mainly for global ETFs or those with T-1 cut-offs;

• Settlement failures: the AFG is calling for a temporary suspension of CSDR cash penalties when T+1 comes into force, in order to facilitate the transition phase;

• UCITS ratios: following a favorable opinion from certain jurisdictions such as Luxembourg and France, it is essential to obtain assurance that breaches of cash and borrowing ratios caused by the transition to T+1 will also be considered as “passive breaches” at the European level (and therefore non-reportable);

•    Article 5(2) of CSDR: the AFG recommends excluding securities financing transactions (SFTs) from the scope of this provision.