The European Securities and Markets Authority (ESMA) has delivered its final report to the European Parliament and Council, recommending that migration to a shortened settlement cycle of T+1 takes place in Q4 2027.
The current T+2 cycle requires transactions executed on trading venues in the European Union (EU) to be settled in two business days, but developments abroad meant that the EU could fall out of step with other jurisdictions – something described as a potential “nightmare”.
In May, North America transitioned to a T+1 settlement cycle and misalignment with the US has already thrown up a handful of issues for ETF trading.
For example, managers of ETFs invested in US securities but which trade in Europe are subject to a ‘funding gap’, where they must purchase the securities on T+1 but do not receive the necessary funds until T+2.
As such, ESMA found that “investing in US securities has become more expensive for ETF fund managers as they need to cover a longer funding gap.”
It has also created an interesting wrinkle called the ‘Thursday effect’.
Investing in US securities has become more expensive on a Thursday for ETF managers given the need to cover a funding gap over the weekend. The level of investments made on Thursdays have thus experienced a “significant drop”, according to ESMA.
ESMA also observed that European ETFs invested in US securities have experienced lower liquidity and traded at higher premiums to NAV since the US moved to T+1 settlement.
Given the headaches created by misalignment with the US, many in the ETF industry have been calling for the EU to move to T+1 settlement in lockstep with the UK, which has self-imposed a deadline of December 2027 for its transition.
ESMA agreed that a “coordinated approach across Europe is desirable” and has identified 11 October 2027 as the optimal date for migrating to T+1.
To support with the technical elements of transitioning to a shorter settlement cycle, ESMA recently announced plans to form a “governance structure”, a move welcomed by the industry.
