EU watchdog considers shorter settlement time for shares

LONDON (Reuters) – Cutting the time it takes to settle a share transaction in the European Union could make the bloc’s capital market more competitive and reduce costs, the EU’s securities watchdog said on Thursday, though it would be a complex undertaking.

Next May, Wall Street, the world’s biggest stock market, along with Canada are reducing the time allowed to settle a trade, whereby ownership is swapped for cash, to one day after the transaction, known as T+1, from two days at present, piling pressure on Europe to follow suit.

The European Securities and Markets Authority (ESMA) said in a “call for evidence” paper that it was looking to consider “all the possibilities for a shortened settlement cycle”, including both T+1 and instant settlement, or T+0.

“Shortening the settlement cycle in the EU might bring benefits in terms of increased efficiency and reduction of counterparty credit risk and the related collateral needs,” ESMA said.

“This might also increase the competitiveness and the attractiveness of EU financial markets, which are goals pursued by the Capital Markets Union.”

Change, however, would also mean one-off IT costs given that more automation in back office processes would be needed given the shorter amount of time to complete a trade, it added.

Regulatory intervention may be needed to implement any change given it could be difficult for a single operator to make the change if all others do not follow, ESMA said.

The call for evidence closes on Dec. 15, with a final report for the EU’s executive European Commission published in the fourth quarter of next year at the latest.

ESMA said it may report back earlier on how international developments in shortening settlement times affect EU capital markets.

(Reporting by Huw Jones; editing by Robert Birsel)