Making its way across the pond: The UK implementation of T+1
14 May 2024
Carmella Haswell speaks to market participants on the UK government’s greenlight for the implementation of T+1, the industry’s response, and how the Accelerated Settlement Task Force will steer the country to a smooth transition
Image: stock.adobe/Sean
As the US, Canada and Mexico brace for the impact of a shortened settlement cycle on 27-28 May, the incorporation of T+1 in the financial industry has made its way across the pond, with the UK government having provided the greenlight for its implementation.
Arguably, the transition from T+2 to T+1 will prove challenging, requiring considerably more change than when markets moved from T+3 to T+2. As with the US, securities transactions in the UK will need to settle on the next business day following the transaction date.
According to the Accelerated Settlement Task Force (AST) Report in March 2024, the UK cannot remain on T+2 indefinitely. A recent survey produced by Citi, ‘Securities Services Evolution 2023’, revealed that 89 per cent of participants now expect their own markets to move to T+1 (or T+0) within five years.
The move to T+1 has become a question of when, and not if.
A policy imperative
The UK government’s decision to follow suit with a shorter settlement cycle has come as no surprise to some. EquiLend has been closely aligned with the transition in the US, Canada and Mexico, and so for the firm’s Gabi Mantle, head of post-trade solutions, the move is understandable.
She explains: “It makes sense to keep settlement cycles across major markets aligned as T+1 intends to reduce exposure risk throughout the settlement cycle. Having misaligned market settlement cycles means that risk does not fully go away.”
Securities finance typically trades on a T+0 basis, Mantle indicates, therefore this particular market is “not adversely affected” by the accelerated settlement. EquiLend says its clients’ systems and processes are already geared to support short settlement cycles, as are the firm’s products.
Echoing the sentiment, Duncan Carpenter, director of product management at Pirum, comments: “Given the global trend towards shortening settlement cycles, it was always a case of when, not if, the UK would follow suit. For our clients, given the reduced time to settle, the move will require faster and more accurate end-to-end processing — goals our products help them to achieve.”
However, there remains a significant impact on securities finance in terms of process. Mantle indicates that this market is reactive to other activity up and down the transaction chain, such as borrowing to cover shorts or recalling to cover a sale.
“It is this reaction time that is reducing for securities finance and will have the biggest impact on our clients,” she reveals. “We are seeing a significant uptick in the adoption of automated solutions, such as EquiLend Recalls, to help speed up reaction times and reduce exceptions.”
To get the ball rolling on this implementation, the Accelerated Settlement Task Force — which was launched in December 2022 by the UK government to explore the potential for faster settlement of financial trades — named Andrew Douglas as chair of its Technical Group in April 2024. He will oversee the delivery of T+1 in the UK.
The group is tasked with delivering two goals. First, the taskforce must plan for the delivery of certain operational upgrades in 2025 that will be necessary precursors to the transition to T+1. This will most likely take the form of a recommendation for either regulatory change; rule book change by the Financial Conduct Authority (FCA), the London Stock Exchange Group (LSEG), or Euroclear UK and Ireland; or changes to market practice. Second, the Technical Group will need to deliver a date for the actual transition, which is to be no later than the end of 2027.
Douglas warns that once the report and recommendations are published by the Technical Group, and accepted by HM Treasury, compliance with recommendations and delivery becomes the responsibility of individual institutions to deliver in the context of their own businesses and deadlines (before the end of 2027).
The greenlight given by the UK government to proceed with this implementation followed the acceptance of AST’s report, which produced recommendations on how the market should move forward and implement T+1, and the appropriate deadlines for such a move.
AST chair, Charlie Geffen, was responsible for carrying out this report, which received its official mark of approval in April 2024. HM Treasury’s enthusiastic reception of the paper and acceptance of all its recommendations, will help to move the necessary associated work high up the industry agenda.
For Douglas, the decision moves the T+1 agenda from “an interesting theoretical exercise” into a “policy imperative”.
Adapt and adopt
The AST report presented 10 key recommendations to aid a, hopefully, smooth transition for the UK to T+1. These covered a number of aspects including a completion date, the operational undertaking, and communication across European jurisdictions.
As previously mentioned, the official implementation of T+1 in the UK should take place before 31 December 2027. In addition, operational changes for the transition should be mandated with effect from a date in 2025 — which is determined by the Technical Group.
Carpenter states: “The report has taken a number of pragmatic steps to help ease the market transition to T+1.” For example, he agrees with the report’s requirement for a 2027 date, and the ability to be flexible with the final date, based on market progress in other jurisdictions. In addition, he says mandating changes to market processing to come in during 2025, such as for matching and affirmations, “will allow participants to adapt and adopt new tooling”, while still “operating with the additional time the current T+2 settlement cycle allows”.
For Mantle, the recommendation to identify and implement market efficiency standards and processes is “excellent”. She continues: “Since the Central Securities Depositories Regulation (CSDR) came into effect in Europe in 2022, market (specifically settlement) efficiency has been a key focus, but there is still a fair way to go in Europe — the same penalty regime does not exist in the UK, so this recommendation makes absolute sense.”
The Technical Group’s draft 2025 plan, due at the end of September, will translate these recommendations into a plan of action.
While all recommendations are critical to the successful transition, states Douglas, history shows that the proposed implementation of complex change in financial markets infrastructure and processes will always receive mixed reception.
Douglas highlights that on one side of the debate, regarding the go-live date, some participants believe 2026 is “dobable” as they do not want to be out of alignment with the US for too long. For others, he indicates, remaining in lockstep with the EU is more important.
“Both arguments are valid, depending on your viewpoint. Equally, either or both might be considered a compromise. What is key, is that we are not hearing that it cannot be achieved from a practical perspective before the end of 2027,” he adds.
Lessons to be learnt
The Technical Group is where “the rubber hits the road”, says Douglas. It will define the concrete steps to be completed, with deadlines. This work forms the bedrock of the eventual transition.
When asked what inspired him to take on the role to lead the Technical Group, Douglas, with more than 35 years’ experience in the post-trade space, responds: “Mainly because Charlie [Geffen] asked me nicely if I would do it!”
More seriously, at the start of AST’s work, Geffen and Douglas were the “only two ‘independents’” in the taskforce. Douglas recalls he slipped naturally into the role of “deputy chair”, although no such position formerly existed.
Reflecting on the task at hand, the group will undoubtedly review the upcoming implementation of T+1 in the US, Canada and Mexico for guidance. Douglas confirms that the AST team has produced a workstream titled ‘Lessons learned from the North American T+1 transition’, which is led by the Depository Trust and Clearing Corporation (DTCC) and J.P. Morgan. The workstream will discuss which key variables the group should consider and analyse from the US transition to T+1.
For Pirum’s Carpenter, the overall settlement rate will be a key metric that a number of market participants will be monitoring closely as the US and Canada move to T+1. He continues: “Within securities lending programmes, there will be a number of other factors that will be important to monitor as markets transition, including availability, utilisation and, importantly, recall success rates.”
In terms of the discussion on recalls, EquiLend’s Mantle says participants have been focused on how to automate recall notifications, how to better monitor the status of a recall, and how to ensure the highest chance of timely settlement to prevent the sale from failing.
“A huge topic of discussion has been around recall deadlines with the US directive stating that recalls can be issued up to 23:59 on T for T+1 due date — this is a shift and is something that has invoked much debate,” she adds. “The whole industry is eagerly watching how this will play out, and the outcomes will drive deadlines and market practice in the UK.”
The use of automation and straight-through processing (STP) will be key in successfully achieving T+1. The true impact of note will be how clients use the technology available to them. Mantle indicates that the entire lifecycle chain needs to be “slick”. Currently, EquiLend automates the securities finance flow from front to back with NGT trading, Settlement Monitor prematching, automated Recalls and Returns, and Exposure & Triparty Management.
One of the main challenges that will be faced during this transition will be the wide variety of systems and differing levels of automation utilised across the market today, says Carpenter. For example, email and phone calls are still being used to communicate recall notifications. He adds: “To achieve a smooth transition to T+1, automated STP must be adopted consistently across the market, allowing participants to best utilise the limited time they will have to ensure settlement.”
To ensure no person is left behind during the lead up and go-live of T+1, Douglas highlights that the key lesson already learnt from the US experience is the importance of communication with all participants in the investment markets. Douglas intends to replicate the work of DTCC, the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI), all of which worked together to achieve this level of communication.
Next step, Europe
As the UK continues to shape its own transition to T+1, it comes as no surprise that other European jurisdictions are considering embarking on the same journey. In March, the European Securities and Markets Authority (ESMA) published market feedback on its Call for Evidence on shortening the settlement cycle in the EU to T+1. The report indicated a mixed response, with participants identifying a wide range of both potential costs and benefits of a shortened cycle, while other respondents supported a thorough impact assessment before deciding.
The UK, EU and other European jurisdictions should continue to explore opportunities for close collaboration, according to a recommendation from the AST report. The idea is to see if the regions can align their moves to T+1. If the EU or other European jurisdictions commit to a transition date to T+1, the taskforce believes that the UK should consider whether it wishes to align with that timeline. However, if that cannot be achieved within a suitable timescale, the AST says the UK should proceed in any event.
Mairead McGuinness, EU Financial Services Commissioner, has made clear that it is a matter of “when not if” for the EU to transition to T+1, says Carpenter. He adds: “My expectation is that the feedback that ESMA received may impact the way the EU chooses to implement its own transition, but it will not affect the ultimate outcome of the market moving to a T+1 settlement cycle.”
Given the close ties between the EU and UK markets, and the multitude of firms operating across both, Carpenter says consistency in settlement cycles will ultimately allow for more standardisation and efficiency of processing.
For Mantle, it is likely that the EU will follow suit and that the UK and EU timelines will be aligned. She explains that the EU is “more complex” as there are more settlement locations to consider, different local custodians to navigate, and higher volumes. However, standardisation is important, therefore Mantle believes there is a high possibility that the EU markets will transition to T+1.
Commenting further, Mantle says: “The benefits of moving to T+1 are consistent with the US and Canada — a significant one being the reduction in exposure from trade date to settlement date which would also apply in other jurisdictions.
Another benefit, she highlights, is that this will give market participants “a more compelling case to adopt automation” — the focus on market efficiency as a precursor to any transition in the UK will highlight the need for technology solutions.
In her final thoughts, Mantle says: “It is coming, and it will be here faster than we know it. Anything that will have a positive impact on market efficiencies should no doubt be welcomed and treated as a good thing.” She advises market participants to make use of the tools available as they can make a huge difference.
Carpenter says the transition is happening, the more firms can do now when looking at processes, systems and technology, the easier the transition will be when it arrives.
The Technical Group will publish quarterly updates and will soon have a website and other media channels available, where market participants can keep up to date with what is going on.
Douglas advises all to “follow, understand, prepare”.
Arguably, the transition from T+2 to T+1 will prove challenging, requiring considerably more change than when markets moved from T+3 to T+2. As with the US, securities transactions in the UK will need to settle on the next business day following the transaction date.
According to the Accelerated Settlement Task Force (AST) Report in March 2024, the UK cannot remain on T+2 indefinitely. A recent survey produced by Citi, ‘Securities Services Evolution 2023’, revealed that 89 per cent of participants now expect their own markets to move to T+1 (or T+0) within five years.
The move to T+1 has become a question of when, and not if.
A policy imperative
The UK government’s decision to follow suit with a shorter settlement cycle has come as no surprise to some. EquiLend has been closely aligned with the transition in the US, Canada and Mexico, and so for the firm’s Gabi Mantle, head of post-trade solutions, the move is understandable.
She explains: “It makes sense to keep settlement cycles across major markets aligned as T+1 intends to reduce exposure risk throughout the settlement cycle. Having misaligned market settlement cycles means that risk does not fully go away.”
Securities finance typically trades on a T+0 basis, Mantle indicates, therefore this particular market is “not adversely affected” by the accelerated settlement. EquiLend says its clients’ systems and processes are already geared to support short settlement cycles, as are the firm’s products.
Echoing the sentiment, Duncan Carpenter, director of product management at Pirum, comments: “Given the global trend towards shortening settlement cycles, it was always a case of when, not if, the UK would follow suit. For our clients, given the reduced time to settle, the move will require faster and more accurate end-to-end processing — goals our products help them to achieve.”
However, there remains a significant impact on securities finance in terms of process. Mantle indicates that this market is reactive to other activity up and down the transaction chain, such as borrowing to cover shorts or recalling to cover a sale.
“It is this reaction time that is reducing for securities finance and will have the biggest impact on our clients,” she reveals. “We are seeing a significant uptick in the adoption of automated solutions, such as EquiLend Recalls, to help speed up reaction times and reduce exceptions.”
To get the ball rolling on this implementation, the Accelerated Settlement Task Force — which was launched in December 2022 by the UK government to explore the potential for faster settlement of financial trades — named Andrew Douglas as chair of its Technical Group in April 2024. He will oversee the delivery of T+1 in the UK.
The group is tasked with delivering two goals. First, the taskforce must plan for the delivery of certain operational upgrades in 2025 that will be necessary precursors to the transition to T+1. This will most likely take the form of a recommendation for either regulatory change; rule book change by the Financial Conduct Authority (FCA), the London Stock Exchange Group (LSEG), or Euroclear UK and Ireland; or changes to market practice. Second, the Technical Group will need to deliver a date for the actual transition, which is to be no later than the end of 2027.
Douglas warns that once the report and recommendations are published by the Technical Group, and accepted by HM Treasury, compliance with recommendations and delivery becomes the responsibility of individual institutions to deliver in the context of their own businesses and deadlines (before the end of 2027).
The greenlight given by the UK government to proceed with this implementation followed the acceptance of AST’s report, which produced recommendations on how the market should move forward and implement T+1, and the appropriate deadlines for such a move.
AST chair, Charlie Geffen, was responsible for carrying out this report, which received its official mark of approval in April 2024. HM Treasury’s enthusiastic reception of the paper and acceptance of all its recommendations, will help to move the necessary associated work high up the industry agenda.
For Douglas, the decision moves the T+1 agenda from “an interesting theoretical exercise” into a “policy imperative”.
Adapt and adopt
The AST report presented 10 key recommendations to aid a, hopefully, smooth transition for the UK to T+1. These covered a number of aspects including a completion date, the operational undertaking, and communication across European jurisdictions.
As previously mentioned, the official implementation of T+1 in the UK should take place before 31 December 2027. In addition, operational changes for the transition should be mandated with effect from a date in 2025 — which is determined by the Technical Group.
Carpenter states: “The report has taken a number of pragmatic steps to help ease the market transition to T+1.” For example, he agrees with the report’s requirement for a 2027 date, and the ability to be flexible with the final date, based on market progress in other jurisdictions. In addition, he says mandating changes to market processing to come in during 2025, such as for matching and affirmations, “will allow participants to adapt and adopt new tooling”, while still “operating with the additional time the current T+2 settlement cycle allows”.
For Mantle, the recommendation to identify and implement market efficiency standards and processes is “excellent”. She continues: “Since the Central Securities Depositories Regulation (CSDR) came into effect in Europe in 2022, market (specifically settlement) efficiency has been a key focus, but there is still a fair way to go in Europe — the same penalty regime does not exist in the UK, so this recommendation makes absolute sense.”
The Technical Group’s draft 2025 plan, due at the end of September, will translate these recommendations into a plan of action.
While all recommendations are critical to the successful transition, states Douglas, history shows that the proposed implementation of complex change in financial markets infrastructure and processes will always receive mixed reception.
Douglas highlights that on one side of the debate, regarding the go-live date, some participants believe 2026 is “dobable” as they do not want to be out of alignment with the US for too long. For others, he indicates, remaining in lockstep with the EU is more important.
“Both arguments are valid, depending on your viewpoint. Equally, either or both might be considered a compromise. What is key, is that we are not hearing that it cannot be achieved from a practical perspective before the end of 2027,” he adds.
Lessons to be learnt
The Technical Group is where “the rubber hits the road”, says Douglas. It will define the concrete steps to be completed, with deadlines. This work forms the bedrock of the eventual transition.
When asked what inspired him to take on the role to lead the Technical Group, Douglas, with more than 35 years’ experience in the post-trade space, responds: “Mainly because Charlie [Geffen] asked me nicely if I would do it!”
More seriously, at the start of AST’s work, Geffen and Douglas were the “only two ‘independents’” in the taskforce. Douglas recalls he slipped naturally into the role of “deputy chair”, although no such position formerly existed.
Reflecting on the task at hand, the group will undoubtedly review the upcoming implementation of T+1 in the US, Canada and Mexico for guidance. Douglas confirms that the AST team has produced a workstream titled ‘Lessons learned from the North American T+1 transition’, which is led by the Depository Trust and Clearing Corporation (DTCC) and J.P. Morgan. The workstream will discuss which key variables the group should consider and analyse from the US transition to T+1.
For Pirum’s Carpenter, the overall settlement rate will be a key metric that a number of market participants will be monitoring closely as the US and Canada move to T+1. He continues: “Within securities lending programmes, there will be a number of other factors that will be important to monitor as markets transition, including availability, utilisation and, importantly, recall success rates.”
In terms of the discussion on recalls, EquiLend’s Mantle says participants have been focused on how to automate recall notifications, how to better monitor the status of a recall, and how to ensure the highest chance of timely settlement to prevent the sale from failing.
“A huge topic of discussion has been around recall deadlines with the US directive stating that recalls can be issued up to 23:59 on T for T+1 due date — this is a shift and is something that has invoked much debate,” she adds. “The whole industry is eagerly watching how this will play out, and the outcomes will drive deadlines and market practice in the UK.”
The use of automation and straight-through processing (STP) will be key in successfully achieving T+1. The true impact of note will be how clients use the technology available to them. Mantle indicates that the entire lifecycle chain needs to be “slick”. Currently, EquiLend automates the securities finance flow from front to back with NGT trading, Settlement Monitor prematching, automated Recalls and Returns, and Exposure & Triparty Management.
One of the main challenges that will be faced during this transition will be the wide variety of systems and differing levels of automation utilised across the market today, says Carpenter. For example, email and phone calls are still being used to communicate recall notifications. He adds: “To achieve a smooth transition to T+1, automated STP must be adopted consistently across the market, allowing participants to best utilise the limited time they will have to ensure settlement.”
To ensure no person is left behind during the lead up and go-live of T+1, Douglas highlights that the key lesson already learnt from the US experience is the importance of communication with all participants in the investment markets. Douglas intends to replicate the work of DTCC, the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI), all of which worked together to achieve this level of communication.
Next step, Europe
As the UK continues to shape its own transition to T+1, it comes as no surprise that other European jurisdictions are considering embarking on the same journey. In March, the European Securities and Markets Authority (ESMA) published market feedback on its Call for Evidence on shortening the settlement cycle in the EU to T+1. The report indicated a mixed response, with participants identifying a wide range of both potential costs and benefits of a shortened cycle, while other respondents supported a thorough impact assessment before deciding.
The UK, EU and other European jurisdictions should continue to explore opportunities for close collaboration, according to a recommendation from the AST report. The idea is to see if the regions can align their moves to T+1. If the EU or other European jurisdictions commit to a transition date to T+1, the taskforce believes that the UK should consider whether it wishes to align with that timeline. However, if that cannot be achieved within a suitable timescale, the AST says the UK should proceed in any event.
Mairead McGuinness, EU Financial Services Commissioner, has made clear that it is a matter of “when not if” for the EU to transition to T+1, says Carpenter. He adds: “My expectation is that the feedback that ESMA received may impact the way the EU chooses to implement its own transition, but it will not affect the ultimate outcome of the market moving to a T+1 settlement cycle.”
Given the close ties between the EU and UK markets, and the multitude of firms operating across both, Carpenter says consistency in settlement cycles will ultimately allow for more standardisation and efficiency of processing.
For Mantle, it is likely that the EU will follow suit and that the UK and EU timelines will be aligned. She explains that the EU is “more complex” as there are more settlement locations to consider, different local custodians to navigate, and higher volumes. However, standardisation is important, therefore Mantle believes there is a high possibility that the EU markets will transition to T+1.
Commenting further, Mantle says: “The benefits of moving to T+1 are consistent with the US and Canada — a significant one being the reduction in exposure from trade date to settlement date which would also apply in other jurisdictions.
Another benefit, she highlights, is that this will give market participants “a more compelling case to adopt automation” — the focus on market efficiency as a precursor to any transition in the UK will highlight the need for technology solutions.
In her final thoughts, Mantle says: “It is coming, and it will be here faster than we know it. Anything that will have a positive impact on market efficiencies should no doubt be welcomed and treated as a good thing.” She advises market participants to make use of the tools available as they can make a huge difference.
Carpenter says the transition is happening, the more firms can do now when looking at processes, systems and technology, the easier the transition will be when it arrives.
The Technical Group will publish quarterly updates and will soon have a website and other media channels available, where market participants can keep up to date with what is going on.
Douglas advises all to “follow, understand, prepare”.
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