Transition from T+2 to T+1 securities settlement cycle: What it means for the Asset Management Industry

Introduction  

The transition to T+1 settlement aims to reduce counterparty risk between the trade and the settlement and align Europe with America and some Asian markets. It also represents progress toward a more integrated capital markets within the Union. However, the compressed timeframe intensifies pressure on post-trade processes, especially for funds. Without sufficient automation, firms risk facing operational inefficiencies and unexpected costs, as observed during the US transition.

Timeline

Following the shift to T+1 settlement by the US, Canada, Mexico, and Argentina in May 2024, regulatory authorities in the EU, UK, Norway and Switzerland have agreed to adopting the same standard for settlement of all securities registered at a Central Securities Depository (CSD) by October 2027. ESMA has developed a three-phase roadmap informed by the US experience and extensive industry consultation:

• Planning phase (Q3 2025): Industry consultation and definition of Regulatory Technical Standards.
• Design and development phase (Q3 2025 – Q4 2026): 
  Implementation planning and system adjustements across market participants.
• Testing phase (through 2027): Industry-wide testing and readiness assessments ahead of the go-live date on 11 October 2027.
   

Expected benefits

Moving from T+2 to T+1 accelerates trade finalisation and reduces the window during which counterparties are exposed to settlement risk. This shortens the period of outstanding positions, reducing exposure managed by CCPs and lowering margin requirements.

Aligning Europe with the US, also resolves existing mismatches, especially in the funds industry, where  securities may settle on T+1 basis while fund shares still settle on T+2 or T+3, creating liquidity gaps and added costs.

T+1 is also a critical enabler of the future European Savins and Investment Union (SIU) by supporting smoother cross-border flows, enhancing market resilience, and fostering greater overall efficiency.

Key areas for attention
 

A technical shift with operational and strategic consequences 

While market infrastructures can already technically support T+1 or even T+0, asset managers and service providers face significant constraints. Processes historically organised over two business days—trade confirmation, matching, cash management, correction, clearing and settlement—will now have to be completed within less than 24 hours, and in some cases only two hours before 23:00 CET.

For funds operating across time zones and asset classes, this dramatically increases the risk of settlement fails, late funding, or instructions mismatches. Execution cut-off times may need to be revised, particularly for global equity and fixed-income funds.
 

Implications for the funds industry 

T+1 further magnifies timing mismatches between portfolio trade settlement and investor subscription/redemption cycles, which typically remain T+2.  For example, cash from a subscription received on Tuesday (T+0) only settles on Thursday (T+2), while trades executed on Wednesday (T+1) may require funding earlier. This can create liquidity gaps and force the use of pre-funding or overdrafts.

Operational communication, particularly with brokers, depositories and custodians, will also need to be fully automated and standardized. Under the draft RTS, electronic communication becomes an explicit responsibility of the asset manager.
 

Strain on middle and back-office functions 

NAV production, share-class hedging, and reconciliations will face tighter timelines. FX hedging windows will shrink, increasing the potential for missed hedges or operational errors. Trade breaks that could previously be resolved the morning of T+1 under the current cycle may now lead to settlement fails.

Administrators will need to accelerate cash verification, trade posting, and settlement processes. This will require reviewing SLAs, adjusting KPIs, and deepening integration with custodians and transfer agents.
 

Automation and preparation are key 

The US experience showed that firms with limited automation had to increase operational staffing by up to 18% to manage exceptions manually.
For European actors, the message is clear: manual spreadsheets, email-based workflows, and fragmented systems will no longer be viable. Straight-through processing (STP) for trade allocation, FX booking, and cash forecasting will become essential. Exception management must shift from end-of-day batch-based processes to real-time procedures. Early coordination with custodians, administrators, and technology providers will be crucial ahead of 2027 testing.

T+1 business transformation impacts most of the front to back-office operations and will require process automation and efficiency to succeed in the new environment.

Undertaking the transformational journey

Regulators and industry players have already begun important work to chart the path forward. In November 2024, ESMA published its report assessing a potential shortening of the EU settlement cycle¹, in recommending a migration to T+1 by Q4 2027. The extended timeline—nearly three years from the report’s publication—reflects the regulator’s concerns about the need for comprehensive preparation.

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Following ESMA’s report, the EU T+1 Industry Committee released its high-level roadmap in June 2025². This roadmap includes 30 recommendations and 57 sub-recommendations organised along the securities value chain and dedicated activities.

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The high-level roadmap of the EU T+1 Industry Committee includes 30 recommendations and 57 sub-recommendations​ organized along the securities value chain dedicated activities.

Enhancing automation across the entire value chain is clearly mentioned as a foundational milestone. This naturally requires market players to improve their static data quality and to ensure alignment with counterparties around commonly accepted timetables and deadlines. Yet the breadth of the recommendations and their prevalence on areas across the entire securities value chain show how impactful and transformative the move to T+1 will be. For many firms, it will demand far deeper changes than traditional IT upgrades or incremental process adjustments, notably:

The roadmap also sets out recommendations for other complex areas—such as corporate actions processing, FX handling, securities financing transactions, and asset management workflows—which add further layers to the settlement process by introducing additional trading steps and interactions among market participants.

Lessons learned from the US transition

European and US markets differ significantly, creating additional complexity for Europe’s transition to T+1. The US operates with a single currency, one major time zone (EST), and a single settlement venue (DTCC). By contrast, Europe spans multiple currencies, four major time zones, 39 central securities depositories across 35 countries, and several central counterparties operating on different timetables. Moreover, although  EU settlement-failure rates are relatively low, the region still lags the US in overall STP performance. Europe therefore faces a considerable journey to reach the necessary levels of automation ahead of the planned October 2027 migration.

Nonetheless, lessons from the US transition can help guide European regulators and market participants in their own transformation efforts. Key takeaways include:

• STP rates of close to 100% and the avoidance of batch processing will be needed to ensure settlement failure rates do not increase after the rollout of T+1.
• The preparation should start early (over year in the US under significantly simpler conditions as highlighted above).
• Emphasis should be put on testing, as DTCC and EFAMA pushed from a months-long testing period in the US which gave participants the chance to fine tune their setups before going live. This is well in line with ESMA’s proposed testing phase between January and October 2027, which will in turn require that market participants implement the necessary changes by the end of 2026.

US firms that did not adequately prepare for the transition experienced a significant rise in workforce costs, covering exception handling and extended non-working hours, which, in some cases, represented up to two-thirds of their total cost of the move to T+1.

Conclusion 

The move to a shorter settlement cycle in the EU, the UK, and Switzerland will deliver important benefits to the industry, especially in reducing counterparty risk and improving liquidity management. At the same time, it will introduce a series of challenges across the securities value chain, which are operationally more complex than in the US due to the specificities of the European market.

To address these challenges and ensure market participants are prepared to comply with the accelerated settlement cycle from day one, regulators and industry working groups have issued recommendations focused on:

• Increasing automation across post-trade and settlement activities.
• Strengthening matching and confirmation processes.
• Revising operational set-ups in more complex areas, such as FX management, securities financing transactions, corporate actions processing, and asset management workflows).

Although nearly two years remain before T+1 is scheduled to go live in Europe, the scale of the challenge demands a paradigm shift in how firms operate, as well as a string cooperation across the market. In line with ESMA’s proposed timeline, firms should begin their impact assessments now and secure the necessary budgets for implementation work in 2026, ensuring they are ready for industry-wide testing in 2027.

Start your impact assessment today and stay tuned for our upcoming publications, where we will explore specific areas of impact and outline practical mitigation actions.