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With North American markets shifting to shorter settlement cycles in a couple of months, European regulators say views are mixed on whether their market should follow suit.

The European Securities and Markets Authority (ESMA) published a report detailing the results of its consultation on the impacts of reducing the settlement cycle from the current trade date plus two days (T+2) to T+1 — a step that will take place on May 27 and 28 in Canada and the U.S.

The report finds the one issue that market players agree on is that the costs of moving to T+0 would outweigh the benefits, and that the industry and regulators should focus instead on a possible shift to T+1.

“According to many respondents, T+0 would not be achievable in the short or medium term, it would require radical changes to the way markets operate and would likely involve new technologies which are not yet deployed at sufficient scale in financial markets,” the report said.

At the same time, moving to T+0 could increase liquidity risk, and potentially result in the loss of trading anonymity, among other negatives, the report noted.

As for a possible move to T+1, the report said respondents indicated this would be technically feasible, although it would require some major changes to the ways markets work — including improvements in post-trade processing that need to happen anyway.

“[A]lthough T+1 is technically possible … mandating a harmonised shift from T+2 to T+1 in the EU would have considerable operational impacts and could even negatively affect the market if not organized properly,” the report noted.

The consultation highlighted a variety of challenges that could arise from moving to T+1, including a dramatic reduction in time for post-trading processes, a lack of automation, inventory management issues and complexities involving cross-border transactions, the report noted.

“Securities borrowing and lending, repo, FX trading and cross-border activities seem to be some of the most challenging aspects of a transition to T+1,” it said.

There were also mixed views on the potential costs and benefits of a move to T+1, and differences of opinion over whether European markets should make the move, the report said.

ESMA noted that, while a majority of respondents see benefits in shortening the settlement cycle, “these benefits cannot always be quantified and in some cases might materialize in the longer term.”

It also said some market players feel the benefits may not outweigh the costs.

“[A] number of respondents remain unconvinced of the positive balance between costs and benefits, possibly also related to the fact that it might be easier to identify the immediate costs (e.g., technology upgrades, standardization, human resources) rather than some of the longer term benefits (e.g., freeing up regulatory capital, innovation, competitiveness),” it noted.

Additionally, the report said many respondents indicated the move to T+1 would be more difficult in Europe than in other parts of the world, due to “the complex and fragmented nature of EU financial markets,” including the lack of harmonized securities laws.

In the wake of the consultation, ESMA said it will continue assessing feedback, including calls for regulatory guidance.

It also intends to learn from the upcoming move to T+1 in Canada and the U.S. — and to further explore issues raised in the consultation.

The regulator said it intends to deliver its final assessment to European policymakers by the end of the year, and ahead of the legislative deadline for a decision, which is Jan. 17, 2025.