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The UK government said it is coordinating the transition to a T+1 payment cycle with the European Union and plans to shorten the payment cycle by the end of 2027 at the latest.
In response to the recommendations of the Payments Facilitation Task Force (AST), the government said it would consult with European jurisdictions on whether a harmonized transition is possible.
The taskforce was established in December 2022 to investigate the possibility of shortening the payment cycle in the UK from T+2 to T+1.
The European Securities and Markets Authority (ESMA) is currently assessing responses to the call for evidence on T+1, which closed in December last year, and is expected to publish its final report in January 2025.
The UK government outlined its response to the AST recommendations as follows: [AST] The report also suggests that there is a need to collaborate with other European jurisdictions to consider whether it is possible to coordinate the transition to T+1. If this can be completed within a reasonable time frame, the transition schedule to T+1 can be adjusted.
“The Government looks forward to engaging with our European partners, particularly the EU and Switzerland, to see if we can coordinate our efforts on this matter.”
According to the report, moving to a T+1 settlement cycle will “improve market resiliency, provide cost savings for investors, and reduce risks associated with longer trade-to-settlement times.” .
“We also need to consider how harmonized payment cycles across major financial centers could be beneficial to market participants,” it added.
The task force outlined several challenges associated with ETF inconsistency, including mismatches between settlement cycles and creation and redemption cycles.
The report said: “During periods of significant settlement cycle misalignment between the UK and the EU, safe harbor mechanisms will be needed in respect of certain securities traded within the UK but settled outside the UK. ” he said.
It also noted concerns about ETFs violating UCITS limits on cash and overdrafts as authorized participants (APs) seek to manage settlement timing discrepancies.
It said the introduction of T+1 for ETFs could be delayed until the EU shortens settlement cycles or UCITS rules are amended to ease the 10% borrowing limit.
However, ESMA has ruled out changes to UCITS rules to address inconsistencies between settlement cycles.
In response to the task force, the Association for European Financial Markets (AFME) welcomed the UK’s proposal to move to a T+1 payments cycle.
AFME CEO Adam Farkas said: “This report recommends a co-ordinated approach across the UK, the EU and other European jurisdictions. We also note that no significant benefits have been identified for the UK capital market to move to T+1 without combining
“We therefore call on the authorities to adopt a cooperative approach to reach a pan-European agreement on timing.”
The misalignment is likely to cause headaches for financial markets as the US prepares to move to a T+1 payments cycle in May, while Europe and Asia move to a T+2 cycle.
The UK government said a technology group has been established to support the UK’s transition to a T+1 payments cycle, with the aim of establishing a “go-live” date in 2025.
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