Shorter stock settlement time in Europe offers slim savings – industry body

By Huw Jones

LONDON (Reuters) – Shortening the time it takes to finalise a share trade in Europe would save industry just 41 million euros ($44.80 million) and take up to two years to phase in, Europe’s clearing house industry body said on Monday.

Wall Street and Canadian markets are moving to ‘T+1’ in May, meaning it will take just one business day after a stock transaction for the trade to be settled, with ownership swapped for cash, compared to two business days at present.

The aim of the move is to cut risk and margin needs by having shorter transaction exposures to changes in markets.

The European Union, Switzerland and Britain also apply T+2, but with no decision yet on matching Wall Street’s move, though the EU’s securities watchdog ESMA has asked market participants to give their views.

In its response, EACH, an industry body for clearing houses in Europe belonging to exchanges such as Deutsche Boerse, Euronext and London Stock Exchange Group, said it wanted to contribute factual information to “enrich” the discussion on shortening the settlement cycle.

Talk of a 41% reduction in margin, or cash to back trades in case of default, is based on an “incorrect” reading of a document from U.S. clearing and settlement house DTCC on T+1, EACH said.

The actual expected reduction is 24.6%, EACH calculated.

For Europe, EACH estimated that savings from moving to T+1 in cash equities would be around 41 million euros a year, or a cut of 0.5% in overall margin across different markets.

Settlement “fails” would likely increase as market participants have less time to fix issues, it said.

“For the time being it is not possible to weigh the benefits against the costs,” EACH said, adding that a minimum of 18 to 24 months would be needed to make the shift.

A coordinated approach that includes Switzerland and Britain would avoid costs going up for cross-border trades, EACH added.

Britain is expected to publish a report on T+1 next year.

($1 = 0.9152 euros)

(Reporting by Huw Jones; Editing by Andrea Ricci)