“How Financial Trading in Europe Will Evolve: Insights and Implications”

EU Financial Markets Anticipate Move to Shorten Settlement Times by 2027

The financial markets within the EU seem poised to undertake a long-awaited shift aimed at reducing the settlement times for financial transactions by the year 2027.
This move would align them with the United Kingdom’s timeline and follow the United States’ transition earlier this year.

A recent industry consultation by the European Securities and Markets Authority revealed that a significant 70% of participants support implementing this change in the fourth quarter of 2027.
Officials and industry leaders are also considering early to late 2028.

The EU’s deliberation regarding settlement timelines comes in the wake of the U.S.
decision in May to shorten the finalization period for transactions, a strategy aimed at modernizing markets, enhancing liquidity, and minimizing the risk of failed trades.

Settlement is the process of reconciling and transferring ownership of assets from sellers to buyers.
Outside of North America and India, this typically occurs within two days.

This issue gained prominence during the meme stock surge in the U.S.
at the height of the coronavirus pandemic, where several brokerage firms, including Robinhood, cited the two-day settlement window as a reason for their systems struggling to keep pace with trading volumes.

Subsequently, the U.S., Canada, and Mexico transitioned from a two-day to a T+1 settlement process for stocks, bonds, and exchange-traded funds.
Similarly, the UK is contemplating a one-day settlement change by late 2027, while India achieved a reduction in settlement times last year.

During the consultation, Sebastijan Hrovatin, a senior official at the European Commission, remarked that the end of 2027 seems “realistic,” emphasizing, “I don’t believe this is an excessive burden.”

Investors expressed concerns that the slower settlement times in the U.S.
compared to global standards could result in a surge of failed transactions.
However, the recent transition in the U.S.
occurred smoothly.

The day following the U.S.
adjustment, the Depository Trust & Clearing Corporation reported that the failure rate of U.S.
equity trades was 1.9%, slightly below May’s average of 2.01% under the T+2 regulations.

Jesús Benito, head of national custody and commercial deposit at the Swiss Exchange SIX, stated that the European target of 2027 “is achievable.” He further noted that “the agreement among panel members that unity among the EU, Switzerland, and the UK on this schedule is highly positive.”

With the EU’s transition expected to be more complex due to the fragmentation of its capital markets, the push towards T+1 has been spearheaded by Gary Gensler, Chair of the Securities and Exchange Commission, who advocates for reduced settlement times in global currency markets as a means to mitigate market risk.

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