Europe’s Move to T+1 Settlement: Next Steps and Possibilities
Europe intends to shift to a T+1 settlement cycle. However, this change might be too late to fix an outdated financial system. It's a step in the right direction, but it is far too late, as major markets are years ahead. T+0 and even atomic (instant) settlement is achievable now.
Atomic settlement eliminates any delay between trading and owning funds. Security and the cash change hands instantly with no overnight gap, no window where one party is waiting on the other or has decided to default before a trade is completed.
Reducing settlement from two days to one is progress but is hardly transformational, as cross-border instant payments already exist (SEPA) across Europe, and its capital markets infrastructure remains fragmented and slow.
At present, Europe risks spending time modernizing towards a model that will soon be outdated, delaying the shift to atomic settlement that is already technically achievable.
Why Does the Shift to T+1 Matter?
The shift from T+2 to T+1 will introduce faster settlement, reducing counterparty risk and collateral requirements and enhancing operational efficiency across the market, bringing Europe in line with the other major markets that will move to T+1 in 2027.
However, the shift will only lead to gradual improvements, as trades will still settle after execution, relying on a complex network of intermediaries, custodians and post-trade processes, as the market's infrastructure remains outdated and unchanged.
When comparing this to Europe's payments infrastructure, the difference is damning. Through SEPA, cross-border transactions can be completed in seconds, but securities transactions operate on delayed settlement cycles.
Europe’s Fragmented Capital Markets Infrastructure
Europe's capital markets infrastructure remains fragmented and slow, unlike cross-border instant payments, which already exist, and this gap needs to be closed.
In contrast to other markets, Europe has an abundance of exchanges, CSDs, custodians, and national market structures. Moreover, its post-trade processes are fragmented, which slows them significantly, with reconciliation, messaging and exception management also increasing costs.
The US moved to T+1 in May 2024 and has more integrated capital markets with a larger scale and efficiency, allowing for smooth liquidity access. Europe wants more integrated capital markets, but its ever-worsening fragmented infrastructure remains a major blocker, and reforming settlement will not resolve the issue.
Atomic settlement has been proven possible, meaning a world without settlement delays is on the horizon, but it is far from achievable with Europe's current infrastructure.
DLT Continues to Progress
Distributed ledger technology (DLT) has suffered from premature marketing across Europe, being pitched as a revolution, a threat, and a speculation vehicle, leaving many unaware of its practical benefits.
What DLT actually is in the context of capital markets is a boring but useful innovation. It is a shared ledger that removes the need for multiple parties to maintain parallel copies of the same truth. When issuance, custody, trading, and settlement sit on the same permissioned ledger, every counterparty reads the same record.
The reconciliation work that today consumes middle-office budgets is no longer needed. Settlement becomes atomic as deliveries and payments are completed in the same transaction, instantly, and coupons, calls, and redemptions become programmable rather than being processed across six vendors.
This is not hypothetical. Under the EU’s DLT Pilot Regime, licensed operators are settling live bond transactions on these rails today, and the ECB’s Pontes trials are testing how central bank money integrates with DLT-based securities settlement. These are production systems handling regulated securities for real investors.
The second-order effects are what matter. Shared infrastructure is the first credible path to taking real cost out of a post-trade base that has barely moved in twenty years.
Atomic settlement against an extended eligible pool changes the liquidity profile of instruments long considered illiquid by default. Once the marginal cost of an additional investor approaches zero, retail fixed income becomes a serious distribution channel.
Europe’s End Goal
The long-term objective for Europe should not simply be to speed up settlements and lower operational costs, as it's too small a change. To move forward, a unified European capital market that moves efficiently across borders needs to be established to allow investors to invest in a range of assets and enable issuers to raise funding at a reduced cost.
Modernizing the outdated post-trade infrastructure is a must if the market is to keep up, and the following changes need to happen:
Shared Infrastructure
This is the best opportunity for Europe to reduce post-trade costs, as a common infrastructure will streamline workflows and remove operational inefficiencies, with this added efficiency improving market competitiveness while reducing costs.
Atomic Settlement
Could improve liquidity and accessibility as cash and securities can be exchanged at the same time, reducing settlement risk and lowering collateral requirements. More efficient capital recycling will enable investors to deploy liquidity more easily, accelerating trading activity.
Retail Fixed Income
If servicing costs reduce, retail fixed income is likely to materialize. A reduction in settlement and custody costs will open bond markets to retail investors, helping Europe push for capital market involvement and a range of investment sources.
Instant Settlement
Europe has the technology to make this a reality. DLT advances, tokenized assets, programmable cash, and modern market infrastructure enable settlements to be measured in seconds; there are no technical limitations; it is simply an operational choice for Europe to hinder any advancement.
For Europe, the goal should be to create a more integrated and efficient financial system that actively supports economic growth and puts European markets in a better competitive position as the digital financial landscape continues to expand. Europe needs to take the next step in introducing a market-wide infrastructure for atomic settlement, as it is a better alternative to T+1 and will help it keep up with other nations.
Key Takeaways
The delayed switch to T+1 settlement in Europe shows that there's a need to improve the way its capital markets work. Moving to T+1 is a step in the right direction, but it might not be enough to keep up with changes in the financial world, especially with new technologies like atomic settlement and distributed ledger technology (DLT).
To really improve efficiency and lower costs, Europe needs a clear and unified plan for its capital markets. This means not just speeding up settlements but also completely revamping the entire post-trade system so that Europe can stay competitive in the fast-changing global financial landscape.
This article was first published in TalkFintech.
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