Transition from T+2 to T+1 securities settlement cycle: What it means for the Asset Management Industry
Summary
The move to T+1 settlement reduces counterparty risk and aligns Europe with U.S. markets, easing cross-border operations. It also supports progress toward a more integrated Capital Markets Union. However, the shorter cycle adds pressure on post-trade processes, especially for funds and ETFs. Firms must invest in automation to avoid operational and cost challenges seen in the U.S. transition.
Timeline
Following the move to T+1 settlement by the U.S., Canada, Mexico, and Argentina in May 2024, regulatory authorities in the EU, UK, and Switzerland have proposed adopting the same standard by October 2027. Drawing on the U.S. experience and extensive industry consultation, ESMA has outlined a three-phase roadmap to guide the transition:
- Planning Phase (through Q3 2025): Industry consultation and finalization of Regulatory Technical Standards (RTS).
- Design and Development Phase (Q3 2025 – Q4 2026): Implementation planning and system adjustments across market participants.
- Testing Phase (through 2027): Industry-wide testing and readiness assessments ahead of the go-live date on October 11, 2027.
Expected benefits
Counterparty Risks: Moving from T+2 to T+1 settlement shortens the time it takes to finalize securities trades, which in turn lowers the risk of a counterparty defaulting. It also reduces the window during which positions remain unsettled, decreasing the overall exposure covered by central clearing parties and the associated margin requirements.
Market Alignments: The move to T+1 settlement will also bring European markets in line with the U.S., which adopted T+1 in May 2024. The current mismatch particularly affects the funds industry and ETFs. When an ETF holds securities that settle on a T+1 basis but the ETF shares themselves still settle on T+2, a funding gap arises. This disconnect can strain liquidity and increase costs—factors that risk undermining the competitiveness of the EU asset management sector.
Stepping towards CMU: The shift to T+1 settlement is also a foundational step toward building the future European Capital Markets Union (CMU). Faster settlement supports greater market efficiency, reduces cross-border friction, and enhances the overall resilience of financial infrastructure. By aligning post-trade processes across EU member states, T+1 helps lay the groundwork for deeper integration, a more seamless flow of capital, and ultimately a more competitive and unified European financial market.
Key areas for attention
A Technical Shift with Operational Consequences
While market infrastructures can be technically already ready to cope with T+1 or even T+0, assets and fund managers and their service providers face a compressed operational window that affects the entire post-trade lifecycle. While all the trade and post trade processes including the cash management, transactions repair are today organised in two business day, tasks such as trade confirmation, matching, cash management, correction, clearing and settlement must now be completed in less than 24 hours—often overnight, especially when dealing with U.S. markets. For funds trading across time zones or multiple asset classes, this dramatically increases the risk of settlement fails, late funding, or mismatched instructions. Execution cut-off times may need to be revised, particularly for global equity or fixed-income funds operating under UCITS or AIFMD regimes.
Implications for the Funds and ETF Industry
The move to T+1 amplifies timing mismatches between the settlement of portfolio trades and investor subscription/redemption cycles, which typically remain on a T+2 basis. For example, when a fund receives subscriptions on Tuesday (T+0), the cash won’t settle until Thursday (T+2), while trades executed on Wednesday (T+1) may already require funding. This mismatch can lead to liquidity gaps or force fund managers to pre-fund positions—often through costly overdraft arrangements. ETFs are particularly affected due to the need for in-kind creation and redemption cycles that depend on the smooth coordination of underlying basket trades, which may now settle faster than the ETF shares themselves.
Strain on Middle and Back-Office Functions
NAV production, FX hedging for share classes, and settlement reconciliation are all subject to tighter cut-offs under T+1. For instance, the window to hedge FX exposure based on end-of-day NAVs becomes much narrower, increasing the risk of missed hedges or operational errors. Trade breaks that could previously be corrected on T+1 morning now risk becoming settlement fails. Administrators will also need to accelerate processes for verifying incoming cash, posting trade settlements, and ensuring accurate positioning. These changes will likely require service level agreement (SLA) renegotiations and tighter integration with custodians and transfer agents.
Automation and Preparation Are Key
The U.S. experience showed that firms lacking automation had to increase operational staffing by up to 18% to manually handle exceptions and compressed processing. For European fund managers, the message is clear: manual spreadsheets, email-based workflows, and fragmented systems will not be sustainable. Straight-through processing (STP) for trade allocation, FX booking, and cash forecasting is no longer optional. Exception handling must move from end-of-day batch processes to real-time monitoring with automated alerts. Early engagement with custodians, administrators, and tech providers is critical to ensure readiness before industry-wide testing begins in 2027.
Clearstream positioning
Clearstream Fund Services, along with our Vestima platform, is already well-equipped to handle the shift to T+1 settlement. As we currently process T+0 transactions involving cash payments, we have established robust systems and processes that can efficiently handle the reduced settlement window. Our experience with T+0 transactions ensures that we can manage the complexities and operational demands of T+1, minimizing the risk of settlement fails and operational bottlenecks. This readiness positions Clearstream Fund Services and Vestima platform as reliable partners for fund managers navigating the transition, providing the necessary support and infrastructure to ensure seamless and timely trade settlements in the evolving European financial market landscape.
Furthermore, the Central Facility for Funds (CFF) offers significant benefits in this context. CFF enhances the efficiency and safety of fund transactions through centralised processing and settlement. It reduces operational risks, improves liquidity management, and provides a robust framework for handling cross-border fund transactions. By leveraging CFF, fund managers can benefit from streamlined processes and greater financial stability, ensuring that they are well-prepared for the future of T+1 settlement.
This content has been produced with the support of Deloitte.