UK's T+1 Transition Takes a Step Forward
Accelerated Settlement Technical Workgroup Sets Out T+1 Task Lists ...
Following the US transition to a shorter ‘T+1’ trade settlement period earlier this year, the UK is seeking to follow suit as it looks to keep alignment with the US timetable. The main drivers of a switch to T+1 from T+2 across both markets are reduced counterparty and liquidity risk.
It is now a case of ‘when’ and not ‘if’ the UK transitions to a T+1 trade settlement period.
The T+1 technical group (TGT) of the UK Accelerated Settlement Taskforce (AST), designed to orchestrate the UK’s move to T+1, has published its proposed recommendations for the transition, calling for market participants to review and provide feedback.
To recap, in March 2024, the taskforce revealed key recommendations for the UK’s prospective T+1 transition in a report, which, have been ‘accepted in full’ by the UK government:
The UK should commit to moving to a T+1 settlement no later than 31 December 2027.
The UK should explore collaboration with other European jurisdictions, with a view to coordinate in terms of transitioning to a T+1 settlement period.
(NB: at this stage, the UK is faced with two possibilities. The first is migrating to T+1 ahead of the EU/Switzerland, which is currently on a T+2 schedule. In this scenario, some instruments such as exchange-traded products and Eurobonds will be exempted pending a subsequent transition to T+1 of the EU and/or Switzerland, removing industry fears surrounding misalignment in this regard. The other is that the UK, and the EU/Switzerland migrate to T+1 together. In this instance, a straight transfer of all instruments covered under the remit of the Central Securities Depositories Regulation will be conducted. At this stage, it is likely that the UK will push ahead with the transition with or without the EU, with the EU facing greater structural challenges due to the wider variety of exchanges and counterparties. The consensus is that the EU would prefer to align a T+1 settlement period alongside the UK).
Certain operational changes to facilitate the transition to T+1 should take place by no later than 31st December 2025.
The UK should establish a technical group comprised of cross-industry experts that helps determine the technical and operational challenges that need to be overcome to achieve T+1 by the end of December 2027.
The TGT, which unofficially began work in January 2024, consists of five technical workstreams (shown below), with governance from several critical financial firms and intermediaries across the UK market, including CREST, the Financial Conduct Authority and Bank of England.
Source: UK AST Technical Group
After conducting a series of workshops and extensive research, the TGT has drafted several key ‘principal’ and ‘additional’ recommendations, covering critical operational and post-trade activities that firms must be able to complete efficiently in a T+1 environment. Principal recommendations cover the areas of success criteria, settlement, FMIs, static data, corporate actions, securities financing and FX, whereas additional recommendations assess environmental issues that need to be addressed if the UK is to maximise the efficiency gains that T+1 could deliver. Although the name suggests otherwise, ‘environmental’ refers to additional housekeeping measures related to trade settlement that are not essential to successful implementation of a T+1 trade settlement period. Currently, 43 principal recommendations and 14 additional recommendations have been drafted. A full list of the recommendations can be found here.
One of the key takeaways from the report is the need for automation, with the TGT emphasising the importance for market participants to shift away from cumbersome legacy systems and digitise workflows, while encouraging outsourcing partners to do the same. The need for automation is one of the key lessons learned from the US transition to T+1, with tighter integration between cross-border FX and equity trading systems an ongoing challenge for some participants across the Atlantic. The report emphasises the need for in-scope firms to start giving close consideration to how they may reinvigorate and automate trade processes in a T+1 environment.
To be clear, the new recommendations are open for consultation by all participants in UK capital markets, whether located in the UK or otherwise, until 31 October 2024. The recommendations are, therefore, not final and are subject to amendment depending on the feedback received from industry participants.
A report containing the finalised recommendations will be released in December 2024, setting expectations for the behaviour and trade processes of in-scope firms.