The complexities of the European ETF market and impact of the Central Securities Depository Regulation (CSDR) increase the need for a “foundational review” ahead of the decision to move to T+1 settlement, according to Peter Whitaker, head of EMEA market structure and regulation at Jane Street.
In a research note, seen by ETF Stream, Whitaker said ETFs listed across Europe have seen an increase in settlement failures over the past year as a result of the Settlement Discipline Regime under CSDR, which came into effect in February 2022.
Therefore, he warned any move from a T+2 to a T+1 settlement regime would create further challenges for the European ETF market which is already struggling to reduce settlement failures despite the cash penalties implemented under CSDR.
According to data from Swift, as many as one in 10 trades fail or need correcting since CSDR came into force last year.
“Given CSDR’s penalty regime imposes real costs to firms for late settlement and matching, the lack of improvement suggests that there may be more “structural” reasons behind late settlement for failing trades in Europe which the additional cost of penalties has not addressed,” Whitaker warned.
“The complexities of European ETF post-trade infrastructure may be a case in point here. For example, a large institutional ETF trade relying on the primary market and creation of new fund units for settlement sufficiency may be challenging to settle within T+2 if placed after a fund’s creation window closes on T. Should the market move to T+1 settlement, this would become more challenging still.”
The move to T+1 settlement has been a key area of focus for the European ETF market after US regulators announced plans to move to one-day settlement by May 2024.
The new settlement regime is designed to drive more efficient use of capital across markets by reducing credit, market and liquidity risks.
However, Whitaker added the US enjoys a “simpler” single currency settlement model in a consolidated location while Europe remains extremely fragmented with multiple central securities depositories (CSDs) and local currencies.
“Europe’s experience post-CSDR, and its fragmented infrastructure, suggest the need for a more foundational review to facilitate such a change including the potential rationalisation of post-trade workflows, including via steps such as CCP interoperability, and adoption of new technologies.
“Given these structural challenges, higher penalties or a mandatory buy-in regime – which is still a possibility in the CSDR legislation – would likely not lead to further large improvement and could have potentially large negative impacts on liquidity and costs to investors.”