ALFI responds to the ESMA call for evidence on the shortening of the settlement cycle

ALFI’s response to ESMA’s call for evidence on the move to T+1/T+0 settlement cycles, dated December 15, 2023, outlines ALFI’s perspectives on the potential transition. The document touches on various aspects of the proposed shift, emphasizing the challenges faced by asset managers, especially in terms of cash management and provides a detailed analysis of the impacts on various operational processes, including matching, allocation, affirmation, and confirmation.
One significant concern highlighted by ALFI is the liquidity gap between the investment date in US securities (T+1) and the fund’s settlement date (typically T+3). This liquidity gap is exacerbated by FX funding issues. ALFI points out that the move to T+1 doesn’t directly benefit asset managers and may, in fact, lead to difficulties in managing cash flow effectively.
One of the key requests made by ALFI is forbearance from policymakers, specifically regarding the potential breach of UCITS Directive cash/borrowing limits due to the impacts of T+1. ALFI argues that a minimum of four years after the US go-live would be necessary for the EU to potentially move to T+1. This request for forbearance indicates the Association’s concerns about the practical implications and challenges associated with a rapid transition.
Additionally, ALFI discusses the potential impacts on fund settlement, investor cut-off, and the increased risk of breaching investment limits specifically due to T+1. The document delves into the financial aspects, addressing costs related to staff relocation, funding, repapering of investment funds documentation/prospectuses, and the need to isolate the T+1 effect on the higher cost of funding.
The response also explores the challenges and potential benefits associated with T+0 settlement, emphasizing the role of advanced technologies in facilitating such a transition. It addresses concerns about potential increases in settlement fails and discusses the expected benefits from a reduction of collateral requirements derived from T+1 and T+0
Moreover, the document provides insights into the proposed steps for achieving a shorter securities settlement cycle, including both regulatory and industry milestones. It emphasizes the **need for sufficient time for testing and technological alignment across stakeholders during the transition phase from US T+1 to EU T+1.
The response goes beyond the ESMA call for evidence, addressing issues not previously covered, such as the adequacy of the Central Securities Depositories Regulation (CSDR) scope of financial instruments for a shorter settlement cycle. ALFI also explores opportunities to further harmonize EU market infrastructures.