European T+2 settlement poses challenge for US ADR trading
This month 27 European nations moved to T+2 – but the US remains on T+3
The introduction of T+2 settlement in 27 European markets this week could be having some interesting indirect effects on securities trading – including an increase in securities lending, and uncertainty over the status of OTC trades, according to senior financial market observers.
On 6 October, France, Belgium, the Netherlands, Sweden, Finland, the UK and Ireland and 18 other countries shortened their settlement cycle to T+2. The move anticipated the European Union’s impending CSDR regulation, under which all European central securities depositories will have to move to T+2 by 2016. But other markets – notably the US – remain on T+3.
“There could be discrepancies between the American Depository Receipts in the US, which are T+3, and the underlying stocks, which are T+2,” said Paul Symons, head of public affairs at Euroclear. “There could be some lending issues to bridge the gap.”
Meanwhile, according to Virginie O’Shea, senior analyst at Aite Group, the divergence in settlement times between the US and Europe will likely cause an increase in securities lending activity, as firms that are very active in the ADR market seek to plug the funding gap between the two cycles by lending. The 27 European markets moved to T+2 on the same date to avoid this issue.
“Nobody disagreed with T+2 settlement – it was just a question of when,” said Symons. “It was decided to move all European markets on a single day, because this is best for the investor. If you are trading from Japan, for example, you don’t want French stocks to move one day, Austrian stocks another, and UK stocks another.”
The difference between the US and European markets may be relatively short-lived, however. US post-trade utility the DTCC has already begun a consultation on moving the US market to T+2 settlement, although there is no timeline for such a move as yet. If successful, the proposal is not expected to take effect until next year. But there are also other issues that may exercise the market.
“The move to T+2 has also caused some degree of confusion in the market about how to treat OTC fixed income trades – should they be T+2 or not? The European Central Bank and AFME have suggested they should be – but not everyone is aware, hence there could be market practice discrepancies across regions,” said O’ Shea.
The OTC trades are not covered directly by the CSDR in Europe, meaning that there is no regulatory obligation to trade OTC in T+2. However, the ECB sets best practices for the market, and other observers have also commented that it is likely a significant proportion of OTC trades would move to T+2 to keep aligned with the primary market.
