EFAMA Note: Impacts of US T1 on EU Regulation

EFAMA published a paper discussing the potential impacts of the US transitioning to a T+1 settlement cycle in May 2024 (US-eventid=19797) on EU regulations. The shift from T+2 to T+1 settlement cycles between the US and the EU is expected to introduce operational challenges and potentially alter market structures. However, a more direct consequence highlighted in the note is the impact on the enforcement of existing EU regulations.
One significant concern is related to UCITS regulations, specifically focusing on cash breaches and borrowing limits. The UCITS Article 52 restricts funds from investing more than 5% of their assets in transferable securities issued by the same entity and 20% in deposits made with the same entity. The note anticipates that the settlement cycle mismatch between the US and the EU will likely result in more frequent cash breaches, necessitating regulatory forbearance and a harmonized approach across EU jurisdictions.
Borrowing limits also pose challenges for both traditional funds and ETFs. The note suggests that the need to bridge funding gaps, especially for funds heavily exposed to US securities, could lead to breaches of UCITS fund borrowing limits. For ETFs, even with a move to T+1 settlement in the primary market, a mismatch with end-investor settlement remains, potentially requiring brokers to manage the shortfall and pass on additional costs to investors.
The note additionally addresses concerns regarding cash penalties under CSDR. The settlement cycle mismatch may lead to failed trades, triggering cash penalties. EFAMA seeks clarity from the EC and ESMA to ensure that these penalties do not apply to primary market transactions affected by the settlement cycle mismatch.