Accelerated Settlement Group calls for collective action to achieve T+1

What does this mean?

The draft recommendations follow previous reports, published in March 2024, on the case for adopting a shorter settlement cycle in the UK and EU. HM Treasury (HMT) has already accepted the taskforce’s recommendation that the UK should move to T+1 by no later than the end of 2027.

Legal and regulatory considerations

The TGT proposes that its final recommendations will constitute a Post-trade Code of Conduct that all market participants who are involved in the trading, clearing and settling of in-scope securities should be expected to adhere to. 

The final report will contain further details on how and when each of the TGT’s recommendations will be implemented. Options include changes to level 1 legislation (e.g. to Article 5 of UK CSDR, which sets the current T+2 settlement requirement), changes to regulators’ and/or financial market infrastructures’ (FMI) rulebooks, and changes to market participants’ legal documentation. The TGT notes that compliance with the Code of Conduct could be reviewed by regulators as part of their supervisory engagement with regulated market participants.

Scope

Under UK CSDR, the current T+2 settlement obligation applies to transactions in securities executed on UK trading venues and settled via a UK central securities depository (CSD)¹. The TGT recommends that instruments that are covered by the existing T+2 obligation should be required to settle on a T+1 basis. However, the report notes that certain instruments will need to be exempted from this requirement should the EU and Swiss markets not transition to T+1 on the same timeframe as the UK, until their settlement cycles are aligned. This includes Eurobonds and exchange-traded products. Trades executed bilaterally (OTC) or via Systematic Internalisers (SIs) are not within scope of T+1.

Market participants will therefore need to review the nature of their transactions to determine whether they are in scope of the obligation to settle on T+1, and may wish to adopt T+1 timelines for all other transactions as well to avoid misalignment risk.

^{1 _{Certain transaction-types are exempt from the requirement to settle on a T+2 basis.}}

Settlement recommendations

The TGT recommends that confirmed settlement instructions should be submitted by UK market participants to CREST by 21:00 on trade date (‘T’), and by non-UK market participants by the opening of the CREST settlement window at 06:00 on T+1.

The group recommends that CSDs and market participants should undertake settlement performance monitoring, to the counterparty level, to identify where improvements to their processes need to be made. It also recommends that a market-wide performance benchmark be established to support an overall drive to improve market efficiency.

The final Code of Conduct will include guidelines for specific post-trade activities to help market participants comply with the expected behaviours.

Industry readiness activities

To support the move to T+1, the TGT recommends a Playbook should be created, covering key activities and potential exceptions that could occur over the transition weekend. It recommends that an industry command centre should be established to provide a single point of communication for the industry and regulatory community. Ongoing outreach to UK and non-UK market participants will also be important in raising industry awareness of the UK’s move to T+1 and the steps organisations should take to prepare for the change.

Changes to market practices 

The report makes a range of technical recommendations, applicable to different types of firms, covering changes to market practices that are needed to support a successful transition to T+1. The principal recommendations include:

What do firms need to do?

The TGT’s draft report underlines the importance of market participants’ preparation for T+1 settlement, and emphasises that adopting the agreed market practices should not be seen as optional. 

A common theme running throughout the recommendations is the need for automation of manual processes, and leveraging the opportunity of T+1 adoption to reduce or eliminate barriers to efficient settlement as much as possible.

Market participants - across the sell-side, buy-side, FMIs, and related third party service providers - should begin preparing now to implement the TGT’s recommendations. This should include the following actions:

1. Conduct impact assessment across policies, procedures, operating systems and capabilities, rulebooks, onboarding arrangements and documentation, use of FMI functionality, and operating impact tolerances, as relevant, to assess readiness for compliance with the TGT’s final recommendations.
2. Prepare to enhance and/or establish new systems and technological capabilities, to meet expected behaviours and increase automation at each step of the trading, clearing and settlement lifecycle.
3. Stand up programme governance and oversight arrangements, and allocate budgets for investments in systems and controls changes as needed.

Next steps

The TGT will provide its final report and recommendations by year end. 

HMT and the regulators may publish further consultations or other communications on any legislative and/or regulatory rule changes required to enact the TGT’s recommendations in due course.

The European Securities and Markets Authority is expected to publish its report on T+1 in the EU in January 2025.