T+1 for Europe: Identifying ways to keep your risks under control

In the second instalment of our new T+1 insights series, we look at risk implications for Europe, and how financial institutions can best navigate the changes ahead… 

The EU, Switzerland and – most recently – the UK’s Accelerated Settlement Taskforce (AST) have all confirmed that T+1 will go live on October 11, 2027.  T+1’s implementation in North America may have been relatively trouble-free, but the EU’s transition is likely to be more complicated.   

However, there are solutions available for impacted financial institutions.  

The industry wakes up to Europe’s T+1 challenges 

Unlike the US, where trades are settled and often cleared through a single entity – the Depository Trust & Clearing Corporation (DTCC) – the EU has multiple Central Securities Depositories (CSDs) and even more Central Counterparty Clearing Houses (CCPs), due to the nature of its capital markets.  EU members will often have their own national CSDs, and in some cases, there may be multiple CCPs within the same market – each supporting different asset classes.   

 “The complexity of implementing T+1 in the EU arises from the diverse markets, the cross-border nature of some activities, and other national legal barriers, which are being analysed by the recently formed T+1 governance structure. It is essential to recognise these multi-faceted challenges to understand fully the impact of T+1’s implementation in Europe,” explains James Pike, Chief Revenue and Business Strategy Officer , at Taskize, who we spoke to and quote throughout this article. 

In such a complex market ecosystem, firms are at a higher risk of suffering from trade fails.   

As a result, this could lead to financial institutions racking up some potentially very large financial losses or even fines under the EU’s Central Securities Depositories Regulation’s (CSDR) Settlement Discipline Regime (SDR). Also, banks and brokers might even find themselves losing client mandates if they struggle to maintain settlement discipline in a T+1 environment.  

To quote James again, “Reputational risk is a very real problem as we move towards T+1 in Europe. I think clients will benchmark their banks and brokers on settlement efficiency once T+1 takes effect. There is a strong possibility clients could shift business to alternative providers if they conclude that their banks and brokers are underperforming relative to their peers.”  

Improving settlement performance will not come cheap either for financial firms, especially as many of them are already grappling with serious cost pressures elsewhere.   

“If firms do not want to be seen as underperforming, then it could cost them quite a bit of money,” James explains. “Some firms may choose to borrow more securities to ensure they fully cover their shorts, particularly if they have inefficient settlement processes. That is an expensive undertaking, and it becomes even more expensive if there are squeezes happening in the market.”  

As T+1’s deadline fast approaches, financial institutions will need to start addressing these risks.   

Avoiding the T+1 risk traps 

T+1 could be tough for Europe, but firms will cope, provided they take a few simple steps first: 

“To begin with, banks and brokers should carry out frank assessments of their current infrastructure and identify any areas where improvements are required, and what needs to be done to achieve that, both internally and externally, ahead of T+1.” 

Once these evaluations are completed, it is likely many providers will reach the conclusion that they either need to upgrade or automate their legacy technology stacks, if they are to stand a chance of navigating T+1.   

“A lot of banks are still reliant on batch driven processes, which is a major problem given the changes that are happening in the market. Many banks are still running their systems on technology platforms which are 40 to 50 years old, for instance.”  

Ensuring that different technology systems can interoperate with each other is also critical for firms if they are to successfully comply with T+1:  

“Technology platforms need to be joined up together. This could be doing something as simple as linking up the trading applications where you book and trade securities with the technology that handles settlements. Unfortunately, this is something that does not always happen at financial firms.”  

And finally, firms should be adapting and enhancing their internal operating models so that they can cope with the abridged settlement timeframes:  

“Financial institutions must make sure that their operations teams interface properly with people in the front office. This will help facilitate better connected workflows. It also means that teams – who interact with each other when resolving trade fails or breaks – have the right tools available to them. Again, as things stand today, this is not happening.”  

Getting outside help 

As firms look to kickstart their T+1 preparations, they are turning to service providers for help.  

In particular, Taskize has a proven track record of delivering better automation at firms, allowing businesses to replace email and manual workflows with something more seamless. Not only does this reduce the chances of human errors at firms, but it expedites operational processes, which ultimately translates into better risk management practices.  

The platform’s real-time data analytics is also having a material impact on settlement efficiency, which in turn has a positive impact on risk management.  

The efficiency benefits are clear for all to see.  For example, when using Taskize, Euroclear’s Client Services Team was able to resolve 70% of one leading bank’s settlement queries in less than two hours over a 13-month period, compared to 24% when communications were carried out over email. The number of queries being solved for a separate client also jumped by 40%, again, a direct result of Euroclear’s adoption of Taskize.  

Through enhanced automation, manual errors and operational risk can both be significantly curtailed. Not only does this minimise the chances of misrouted transactions due to incorrect Standing Settlement Instructions (SSIs), but it will also lead to a reduction in overall client call-back verification requirements.  

Automation will help firms manage their CSDR compliance too, an outcome that could lead to a reduced penalty count for trade fails.  It will also bring other strategic benefits – for example, firms will now have an auditable track record of SSI changes and settlement transactions – together with a centralised, standardised data exchange process.  

Automation of the sort enabled by Taskize will ultimately help firms optimise their risk management at a time when markets are getting more volatile and unpredictable.