The US and Canada have already made the switch to T+1. What key lessons should European repo and securities finance professionals be taking from their experience?
The North American transition revealed both opportunities and significant pain points that we need to anticipate. While they saw improved affirmation rates and reduced capital requirements — which are certainly positive outcomes — the securities finance and repo markets faced particular challenges that hit harder than many expected.
The most immediate impact was the dramatic compression of timeframes. What was previously a relatively comfortable window to source and recall securities became a matter of hours, not days. Many firms discovered their manual recall processes were simply not fit for purpose in a T+1 environment. Email-based communications and human intervention points became major bottlenecks.
What is particularly concerning for Europe, is that we operate under the Central Íø±¬³Ô¹Ï Depositories Regulation (CSDR) penalty regime, which the US does not have. So the financial consequences of fails will be more severe for European market participants who are not adequately prepared.
What makes securities finance and repo particularly vulnerable to T+1 settlement challenges compared to other market segments?
The repo market operates on extremely tight timeframes already, with much of the market on overnight or same-day terms. When you compress the settlement cycle for the underlying securities, you are putting enormous pressure on operational processes that support these instruments.
Take recalls, for example. In a securities lending transaction, if the lender needs those securities back to settle a sale, every minute counts in a T+1 environment. The traditional process of sending recall notices via email, waiting for acknowledgments, and manually processing returns simply will not work.
Collateral management becomes dramatically more complex too. The velocity of collateral needs to increase — substitutions that once had a comfortable window now need to happen almost immediately. This requires real-time visibility of inventory and settlement status, which many firms simply do not have yet.
Another critical factor is the lack of standardisation around cut-off times. Without market-wide agreement on recall deadlines, we are facing a situation where different participants will be working to different schedules, creating uncertainty and increasing the risk of settlement fails.
Europe has its own unique challenges that were not factors in the US transition. Can you elaborate on those?
Absolutely. Europe's market structure is fundamentally more complex. We have multiple CSDs rather than a single entity like DTCC, different settlement platforms, and a more fragmented custody landscape. This creates additional connection points where delays can occur.
The time zone issue is also more acute for European entities dealing with global counterparties. When you are working with Asian or American counterparts, the compression of settlement cycles means you might miss critical cut-off times due to time zone differences. This is especially problematic for FX settlement windows that support cross-border transactions.
And as I mentioned earlier, the CSDR penalty regime adds a financial dimension that was not present in the US transition. Fails are not just operational headaches — they come with direct financial penalties that will impact bottom lines.
What are you seeing among your clients in terms of readiness for T+1? Are there common gaps emerging?
The readiness landscape is quite varied. The firms that are best positioned are those that have already invested in straight-through processing and automated recall systems. They will need refinements rather than wholesale changes.
However, I am concerned about the number of organisations still relying on manual processes, particularly for recalls and substitutions. These are going to be the highest risk areas when T+1 arrives. We are seeing too many firms with email-based recall procedures or processes that require multiple human touch points. These will simply collapse under T+1 timeframes.
Another common gap is around intraday liquidity management. Many firms have not fully assessed how compressed settlement cycles will affect their funding requirements. There is going to be more pre-funding needed and less flexibility in managing cash positions throughout the day.
The cross-border dimension is also underappreciated. Firms with significant business across time zones are only beginning to map out how these trades will function when settlement windows shrink dramatically.
What specific actions should securities finance and repo desks be taking now to prepare, even though 2027 might seem distant?
First and foremost, automate your recall processes. This is the number one priority. Move away from manual, email-driven recalls to rules-based, automated solutions. This single change will dramatically reduce your risk of fails under T+1.
Second, establish clear and consistent cut-off times with your counterparties. This needs to be a collaborative effort. Work with borrowers, lenders, and agents to agree on standard deadlines that everyone can adhere to, and make sure these are well-communicated and understood by all operational staff.
Third, review your collateral and settlement infrastructure. You need real-time visibility of positions, settlement status, and inventory. Systems that batch-process overnight will not give you the responsiveness required for T+1.
Fourth, conduct a thorough assessment of your liquidity needs. T+1 will require more pre-funding and sophisticated intraday liquidity management. Review your funding lines and overdraft arrangements to ensure they can accommodate the new reality.
Finally, do not underestimate the cross-border impact. Map out precisely how time zones and FX cut-offs will affect your ability to recall and deliver securities on time. This is especially critical for European firms dealing with Asian or American counterparties.
Industry collaboration seems essential for a smooth transition. Are you seeing enough coordinated effort across the market?
Honestly, no. This is an area where I believe we need to accelerate our efforts. The successful transition in the US was underpinned by extensive industry testing and collaboration. In Europe, we are still in the early stages of this process.
We need more coordinated market testing, particularly across borders and with triparty agents. These tests need to simulate the full trade lifecycle, including recalls, substitutions, and fails management, to identify bottlenecks before they become real-world problems.
Industry bodies are beginning to focus on this, but I would encourage every firm to actively participate in these initiatives. The learning that comes from shared testing is invaluable and will help shape practical solutions that work for the entire market.
Beyond the challenges, do you see opportunities for securities finance in a T+1 environment?
Absolutely. Every market change creates both winners and losers. The firms that adapt quickly will find significant opportunities in this new landscape.
We are likely to see increased demand for securities lending to meet compressed settlement windows. Borrowers will need efficient access to inventory to avoid fails, potentially increasing overall volumes in the securities lending market.
T+1 is also a powerful catalyst for modernisation. Firms that invest in automation and streamlined processes will not just be prepared for T+1, they will have more efficient, cost-effective operations across the board. This could lead to competitive advantages that extend well beyond settlement cycles.
There is also the benefit of reduced counterparty risk and potential for new market efficiencies. With faster settlement comes lower risk exposure and the possibility for new trading strategies that capitalise on increased settlement certainty.
Some market participants have suggested that T+1 could actually reduce liquidity in certain segments of the repo market. Do you share this concern?
It is a legitimate concern. When you compress timeframes, you inevitably reduce flexibility. This could impact market liquidity, particularly for certain types of structured transactions or those involving less liquid securities.
The key question is whether market participants can adapt their processes quickly enough to maintain current activity levels within compressed timeframes. If they can not, we might see a retreat to simpler, more standardised transactions and potentially higher costs for more complex deals.
However, I am cautiously optimistic. Markets are incredibly adaptive, and we have seen time and again how initial concerns about regulatory or structural changes often give way to innovative solutions that maintain or even enhance market functioning.
The critical factor will be how quickly the industry embraces automation and standardisation. If we can achieve near real-time processing of trades, recalls, and substitutions, the impact on liquidity could be minimal or even positive in the long run.
As we look ahead to 2027, what is your final message to European securities finance professionals?
Do not wait. 2027 might seem distant, but the scale of operational change required for many firms is substantial. Start your preparations now, with a methodical assessment of your entire trade flow from execution through to settlement.
Focus first on the highest risk areas — recall processes, collateral management, and cross-border trades. These will require the most significant changes and will benefit from extended testing periods.
Engage actively with industry initiatives and be prepared to contribute to the development of market standards. The strength of our industry has always been in collaboration, and T+1 is a challenge that requires a coordinated response.
Finally, view T+1 not just as a compliance exercise but as an opportunity to modernise and strengthen your operations. The firms that approach this transition strategically will emerge more efficient, more competitive, and better positioned for whatever comes next in our ever-evolving market.
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MarketAxess
Sunil Daswani
Image: Glenn Handley 