European banks explore shift to single-day trade settlement

European banks and brokers are exploring halving the two-day window to finalise share trades to avoid falling behind the US in a race to upgrade the plumbing of global capital markets.

The Association for Financial Markets in Europe, which represents banks and brokers, will set up a new industry group to assess the practicality of settling millions of securities deals in a single day across the region.

The unobtrusive activity of settlement, where trades are reconciled and assets legally transferred from seller to buyer, was thrown into the spotlight two years ago in the US by meme stock mania.

Some brokers, including Robinhood, blamed the two-day period for their systems being unable to keep up with the volume and pace of trading and said the window left customers’ money at risk if deals failed.

Last month, the US confirmed it would move to single-day settlement by May 2024, along with Canada. India made the transition this year. The US decision was the trigger to set up the working group in Europe, said Peter Tomlinson, director of post trade and prime services at AFME.

For Europe, moving to single-day settlement “is a question of how and when, not if”, he said.

“The UK and EU don’t want to be seen as slower and less advanced as the US market,” said Tony Freeman, an industry consultant.

But AFME warned that Europe’s landscape was more complex than in the US, where the securities market plumbing is run by a single company, the Depository Trust & Clearing Corporation.

“Europe has 18 clearing houses . . . multiple currencies, multiple legal frameworks, more complexity and more things to consider as to how we can actually implement this,” said Tomlinson. “The risk is that if this project is done in a rushed or uncoordinated way . . . the end result will be an increase in settlement fails and decrease in operational efficiency.”

Europe last shortened its settlement window in 2014, and the European Union is likely to only review the bloc’s regime in 2025. However, the UK is also looking at speeding up settlement times as part of a sweeping post-Brexit review of the competitiveness and efficiency of its capital markets.

Virginie O’Shea, founder of capital market advisory firm Firebrand Research, said European regulators would inevitably consider moving to T+1 settlement because Britain was already going down that route.

“Centres trying to bid for business against London, like Paris or Amsterdam, will feel it’s an advantage to have a shorter settlement cycle to be more competitive,” she said. “The last thing Europe would want is for some markets to move and some not to.”