FCA urges firms to 'act now' ahead of trade settlement changes as ESMA publishes final report on T+1 transition

The UK regulator has urged firms to ‘act now’ ahead of the UK’s transition to a T+1 settlement cycle in October 2027 and consider automation to improve efficiency and keep costs down.

Deadlines for the changes to settling financial transactions begin next year, the FCA’s head of capital markets Jamie Bell pointed out in a note published on Friday (10 October).

Under T+1, many trades must be settled one business day after execution, which will reduce the time firms have to process transactions by around 80%.

The initiative is designed to improve market efficiency, reduce risk and align the UK with global settlement standards.

“Planning early will be crucial,” Bell said. “The later you start making changes, the more it’s going to cost you in the future.”

Bell suggested five steps firms can take in preparation:

• Strengthen your inventory management  
  Knowing where your securities are, having them in the right place at the right time, and being able to access them quickly, is essential.
• Review your end-to-end settlement arrangements
  Analyse whether (and where) to improve your end-to-end arrangements for the trading, clearing and settlement of transactions to support T+1. Settlement is a complex web of related transactions. The weakest link will determine success or failure.
• Automate where appropriate  
  While we are focused on outcomes, it’s clear that, for most firms, automation will be key to successful transition to T+1. If you rely on extra staff to support manual arrangements, this may not only increase operational costs but also increase the risk of penalties for late settlement. Automation can help improve efficiency and keep costs down.
• A successful US transition won’t guarantee success in the UK 
  It’s important to account for the differences between UK implementation and the US, and the complexities of a coordinated UK/Europe/Switzerland move to T+1.
• Engage clients and counterparties early 
  Your ability to settle transactions T+1 will depend on your arrangements with clients and counterparties. While confident about their own preparations, many participants are concerned about the readiness of their clients and counterparties. Work together on how you can support each other. (Clients should also reach out to their firms to understand what they need to do.)

Bell said firms cannot copy and paste preparations made for the US move to T+1 in May 2024, not least because of the additional complexity of cross-border settlements across Europe.

“The US move benefitted from a long lead time and detailed planning for T+1, as well as centralised post-trade infrastructure,” he said.

“Participants cannot simply rely on their preparations for the US move to T+1, as the UK has distinct and separate post-trade arrangements.”

Clients and counterparties overseas also need to be brought up to speed on the changes, Bell said, noting feedback from firms citing concerns about how prepared Asia-Pacific clients are.

“Work with your counterparties, clients (particularly smaller or overseas), trading venues, CCPs and CSDs to make sure they have suitable arrangements in place to settle their transactions.

“This will be particularly important for custodians with smaller firm clients on the buy-side.”

He added: “We expect participants to be able to tell us in detail your plans for T+1 and how you are addressing any existing issues in the settlement process.”

Meanwhile, the European Securities and Markets Authority (ESMA) has published its final report recommending significant amendments to the regulatory technical standards (RTS) on settlement discipline, which will facilitate the transition to T+1 in Europe by October 2027.

These include:

• Same-day (trade date) timing for trade allocations and settlement instructions.
• Machine-readable formats for allocations and confirmations.
• Mandatory implementation of key functionalities such as hold and release, auto-partial settlement, and auto-collateralisation.
• Updated provisions for the monitoring and reporting of settlement fails.
• A phased-in implementation schedule, beginning in December 2026 and concluding by 11 October 2027, intended to ensure a smooth transition to the new regime.

The draft amendments have been submitted to the European Commission, which has three months to make a decision on their adoption.

In an update published today (13 October), the regulator said: “ESMA strongly encourages market infrastructures, financial intermediaries and their clients to treat these regulatory changes as a central element of their T+1 transition strategy.”