The European Securities and Markets Authority (ESMA) has initiated a call for feedback regarding the potential streamlining of EU settlement cycles for trades completed on trading venues. Currently, the settlement of a trade must occur by the close of the second business day following the trading day, a cycle known as T+2. However, with this new call for evidence, ESMA is exploring the feasibility and potential benefits of shortening this process.
This proposition came as a surprise to many in the finance industry, but the reasoning behind the initiative suggests that a shortened settlement cycle could benefit the industry in a number of ways. By reducing the time between trade execution and settlement, inherent risks including counterparty and default risk could be simultaneously diminished.
According to legal news provider JD Supra, the window for submission of responses is open until December 15, 2023. ESMA is expected to deliver a report to the European Commission sometime in 2024. However, an earlier report could be submitted if ESMA determines sufficient evidence has been collected.
It is worth noting, however, that any proposed changes to the settlement cycle will likely face significant scrutiny. Industry insiders will be on the lookout for potential impacts on liquidity, order fulfillment, and trade efficiency, amongst other factors. Regardless of the potential pros and cons, ESMA’s decision to open this dialogue presents a unique opportunity for stakeholders to share their views and potentially influence future regulatory frameworks within the EU’s trading system.