Settlement Speed-Up Going Global?

In late May, US stock trades switched from settling the second business day after the transaction (T+2) to the first business day (T+1). At the time, headlines were a little leery, warning of the potential for more failures as the system worked through inevitable growing pains—especially in international transactions, given Europe and other markets still used T+2. So, how is it going? Pretty well—hiccups have been minor. So good, apparently, that Europe and the UK are ready to jump on the bandwagon.

That is the interesting news in a Bloomberg article Wednesday. The UK had announced back in March that it would adopt T+1 by the end of 2027. But the EU didn’t immediately follow suit, likely for a couple reasons. One, its legislative process is rather cumbersome. Big changes usually require approval not just from the European Parliament, but also national leaders and parliaments. Two, it doesn’t have a unified, bloc-wide capital market. Each member state has its own, so adopting T+1 in the EU means getting 27 individual national markets ready (or, if this is at the eurozone level, 20).

But now it seems they are ready to bite the bullet. A policy officer from the European Securities and Markets Authority (ESMA) told Bloomberg Europe is targeting Q4 2027 or Q1 2028 to switch from T+2 to T+1. “In a poll conducted at a public hearing Wednesday, around 70% of respondents called for the switch to happen in 2027. … the EU’s financial regulation chief, Mairead McGuinness, has said the ‘question is no longer if, but how and when’ it happens.”^[i]

Policymakers acknowledge the switch across a few dozen countries is a challenge, but they aren’t deterred, thanks to how well it went on our shores: “A gauge of US trade failures ticked higher to 2.30% following the transition, versus a May average under T+2 of 2.01%, according to a Depository Trust & Clearing Corp. presentation at ESMA’s hearing. These rates are ‘broadly consistent’ despite ‘some concerns they might rise sharply,’ the presentation said.”^[ii]

Aha, there it is! Those warnings that the plumbing would get backed up after regulators changed the pipes? They proved wide of the mark. International trades didn’t fail left and right due to the mismatch in when the currency trades underpinning them would settle (T+1 in the US, T+2 abroad). Instead, financial institutions’ efforts to speed up foreign currency transactions and staff up their international desks bore fruit. Everyone met the challenge and got on with it, and now the EU and UK see this as an opportunity to remove the misalignment between their settlement systems and the US’s. Once accomplished, that would ease the US change’s primary (and small) pain point.

This is kind of how financial innovation always works. The world gets used to a certain way of doing things. One country figures out how to do them a smidge better as technology improves. The rest of the world sits back and lets them test the waters and identify potential hiccups. When things go ok, the rest of the world follows suit. This is how we got from T+5 to T+1 over time. It is how we moved from physical paperwork to electronic trades. And it is how we got to the world of negligible stock trading commissions. A happy, giant, global game of hey if you can do that I can do it too!

Some are a little glum that we will still have three-plus years of US and European settlement timelines not aligning. But the exceedingly low failure rates thus far show this isn’t the big disruption some made it out to be. Rather, it is the kind of annoyance businesses are good at dealing with. It will be nice when it goes away, no doubt, but the financial world has already proven it can manage just fine.