ESMA consults on the potential impact of shortening the standard settlement cycle

ESMA has launched a CfE to assess the possible impact of shortening the securities settlement cycle in the EU. The current settlement cycle in the EU stands at T+2, meaning that securities transactions are settled two business days after the trade occurs. ESMA is now considering the reduction of this cycle to T+1, which would expedite the settlement process.
ESMA is soliciting feedback and quantitative evidence from a broad spectrum of stakeholders involved in financial markets, including CSDs, CCPs, trading venues, investment firms, issuers, fund managers, retail and wholesale investors, and their representatives.
The primary objectives of this consultation are to gauge the potential costs and benefits of moving to a shorter settlement cycle, to identify the specific impact on market operations, and to assess the regulatory actions needed to facilitate a smooth transition. This change is seen as a means to enhance efficiency, reduce counterparty risk, and make EU financial markets more competitive and attractive, all in line with the goals of the CMU.
ESMA acknowledges the complexity of the EU’s post-trade landscape, the high number of market infrastructures, and the need for harmonization amid national securities laws. They also highlight the challenge of transitioning to a shorter cycle, emphasizing that the timing and process are crucial aspects.
The consultation covers various aspects, including the impact on market players, operational changes required, costs associated with the transition, benefits of a shorter cycle, and potential impacts on trading and retail investor access. Furthermore, stakeholders are asked to consider the scope of financial instruments covered by current regulations and international developments in settlement cycles.
The feedback collected will be used to provide a comprehensive assessment and inform any necessary regulatory actions. ESMA plans to publish a report with its findings in 2024, with the possibility of an earlier report if regulatory actions are required.