To exempt, or not to exempt
29 April 2025
Leading the transition to T+1 for Europe and the UK, Giovanni Sabatini and Andrew Douglas sit down with Carmella Haswell to discuss the possible exemption of SFTs from the shorter settlement cycle
Image: stock.adobe.com/nicoletaionescu
On the mind of many in the financial markets, the shortening of the settlement cycle to a T+1 timeframe will see Europe, the UK, and Switzerland settle securities transactions one business day after the trade date. While respective taskforces prepare for its implementation, a key question remains 鈥� will securities financing transactions (SFTs) be exempt?
The debate goes back to 2014 when the first action to shorten the settlement cycle from T+3 to T+2 was implemented. At the time, the issue was raised about the need to exclude this type of transaction 鈥� repo, reverse repo, and securities lending.
Speaking to 麻豆传媒 Finance Times, Giovanni Sabatini says this type of transaction is not always connected to a specific settlement process. Repo and reverse repos are mainly used by the treasurer to adjust their liquidity position, meaning that they need sufficient flexibility.
鈥淚f firms trade a repo today, they have to set up the first leg of the transaction on T+1. They may add rigidity to the process of cash management of the treasurer that is inconsistent with the real nature of this transaction,鈥� he confirms.
As the independent industry chair, Sabatini is leading the EU鈥檚 work to facilitate the migration to a shorter settlement cycle. He acts as a link between the industry and the public sector.
Earlier this year, Sabatini sent a letter to the European 麻豆传媒 and Markets Authority (ESMA) to argue for an exemption of SFTs. In his words: 鈥淭hese transactions are like the oil in the settlement process. If you make this oil too sticky, it doesn't work in the settlement process, and it makes the settlement process more complex.鈥�
The T+1 regime is needed for outright transactions (the buying and selling of securities). This is clear in the US environment, where Sabatini says this issue is 鈥渘ot relevant鈥� because, by definition, repo transactions are out of the scope of the T+1 rule.
In Europe and in the UK however, this is not the case. The Central 麻豆传媒 Depository Regulation (CSDR) has a wider breadth, with only OTC transactions out of scope for T+1.
鈥淭oday, there is a trend of moving repos, including forward repos, on to trading platforms. If regulators impose the T+1 discipline to this transaction, the only result is that firms will move away from trading platforms and toward OTC for this type of transaction, therefore reducing the transparency of this market, which is not beneficial,鈥� warns Sabatini.
In alignment
Fully aligned on the issue, Andrew Douglas, chair of the UK Accelerated Settlement Task Force, says 鈥測ou cannot get cigarette paper between the UK and EU鈥� when it comes to the topic of the SFT exemption. The UK is working with regulators on both sides of the channel to ensure it has a similar, if not identical, outcome 鈥� a full exemption.
鈥淪FTs are the oil in the engine of finance, and if we don鈥檛 want that engine to grind to a halt, we have to ensure the smooth flow of oil,鈥� notes Douglas. Although the process to achieve a full exemption will take time, those leading the transition to T+1 are determined.
The European Commission has already put forward its proposal to amend the CSDR in preparation for the shorter settlement cycle. For the time being, the proposal has not included an explicit exclusion of SFT transactions. The process for finalising the amendments of a European directive is quite complex and long, indicates Sabatini, who hopes to find agreement with the Commission on the first proposal amendments.
For Douglas, it is imperative that market participants, and regulators, are of the same understanding. In the UK, the taskforce was built on three principles.
One is inclusivity 鈥� everybody has a voice in agreeing the result to any problem. The second is transparency, so that everybody sees what is going on. And the third is independence, so that there is zero chance that one participant constituency will be favoured over another. Those same three principles are being applied here, for the SFT exemption.
Douglas continues: 鈥淭he reality is, it addresses something that is missing from the original legislation, way back when nobody explicitly considered the impact of settlement timeframes on SFTs. So the market assumed that they were exempt although that is not stated, and essentially this is an attempt to clear that up.鈥�
According to Sabatini, the regulator鈥檚 main argument against the exemption is that, up until now, the industry has been able to manage this type of transaction 鈥� and so they are also questioning why the industry was not more vocal in 2014 with the transition to T+2.
However, in 2014, the amount of repo and other SFTs executed on the trading platform was minimal, he highlights, therefore most of these transactions were executed over-the-counter 鈥� OTC transactions were out of the scope of T+2.
He highlights a current trend which 鈥渟hould be favoured鈥�, which is the move from OTC transactions to trading platform transactions, as this 鈥渋ncreases transparency and allows for more monitoring of this activity鈥�. This presents as a core reason to now ask for a clear exemption of SFTs, so as to avoid putting a stop to this 鈥減ositive trend鈥�.
In addition, Sabatini notes that reducing the settlement cycle reduces the flexibility of the instrument 鈥� a second reason for these T+1 leaders to opt for a full exemption.
Concluding his thoughts on the possible exemption, Douglas says: 鈥淕iovanni and I are both optimistic that this will be resolved ASAP because, from my perspective, this is a distraction from the real issue, which is: are people getting ready for T+1? But I'm hopeful that, certainly by the middle of this year, this will be done and dusted.鈥�
The race to T+1
The starting gun has been fired and market participants appear enthusiastic to start the race to T+1. While firms are at different points in their journey 鈥� with some having read the implementation plan, or have allocated a budget for future work 鈥� there are those that are yet to begin. For Douglas, his role is to ensure companies jump on the bandwagon and move at pace for the 11 October 2027 deadline.
He warns that while the deadline to implement the shorter settlement cycle is two-and-a-half years away, this project began in January 2023 鈥� the endeavour is already at the halfway point.
If firms stick to the deadlines identified in the transition plan, Douglas believes it will get them into a good place to start the fine-tuning and the testing that will allow firms to get over the line in October 2027.
He explains: 鈥淚'm encouraging folks to get on with their transitions as soon as possible which I realise is a slightly different way than the way we typically operate in this industry 鈥� we tend to work right up to the deadline and then do everything at the last minute. I'm hoping we can move the industry into a different mindset as to how it addresses this particular change.鈥�
Unlike the US and UK, Europe has an additional layer of complexity, due to the market fragmentation caused by multiple jurisdictions. All member states are covered by the European legislative umbrella 鈥� CSDR. However, there are a number of specific national laws, market practices and local requirements that may have to be taken into account in the process of moving to T+1. For this, a robust framework is required.
In January this year, a new governance structure to support the EU transition to T+1 was announced.
鈥淲e have set up this governance arrangement to ensure that the process to T+1 will be sufficiently inclusive and that all the relevant parties have the opportunity to participate in the industry committee and in the technical workstream,鈥� says Sabatini.
He adds: 鈥淲e are also open to the participation of non-EU associations to be sure that we will receive inputs, comments, and suggestions from market participants, particularly those located in different time zones, because in the end, they will be most impacted by the shortening of the settlement cycle.鈥�
The technical workstreams are working at maximum speed because, as Sabatini describes, 鈥渁n ambitious deadline鈥� has been set for the release of the first set of high-level recommendations 鈥� otherwise known as the EU implementation roadmap to T+1. The roadmap is set to be delivered by the end of June 2025.
Leading the EU, Sabatini suggests that this date was selected to provide time for market participants to plan the investment needed to upgrade their systems and to increase automation 鈥� firms are planning their budgets for 2026. Furthermore, the European Central Bank, which is managing the settlement system T2S, is requesting inputs or proposals to amend timetables or operations in T2S be entered as soon as possible, due to its 鈥渃omplex internal decision-making process鈥�.
Following the release of the implementation roadmap for the EU, there will be a public consultation (through July and August). In the meantime, Sabatini and his team will work on the second set of documents, namely a more detailed implementation rulebook, which will dictate the best practices that are needed to comply with the recommendations.
Sabatini explains: 鈥淗ere we have an issue. We have to strike the right balance between being prescriptive in order to ensure certainty of behaviour, at the same time we have to be sufficiently flexible to accommodate all of the different starting points of the different participants in the market.鈥�
CSDs in different jurisdictions have different levels of automation or complexities, and the EU taskforce will need to take into account the different dimensions of market participants.
2027 will be the year to start testing the implementation. The EU task force will draft the transition playbook to identify all the needed steps to ensure that on 11 October 2027, everything will run smoothly, and then it will monitor the result of the transition.
鈥淲hile in the UK the approach is more market practice based, in the EU we are used to a more regulatory-based approach, and that requires more coordination between the industry and public authorities to be sure that we are progressing hand in hand,鈥� states Sabatini.
Hope on the horizon
As the UK, EU, and Switzerland continue on this journey, it will be imperative that each region aligns with one another to cross the finish line.
Douglas states: 鈥淚'm very confident that we will move together. In the film 鈥楲e Mans 鈥�66鈥�, Ford had a plan that all three cars should cross the line at the same time. And that's our plan, to have the three jurisdictions all cross the line at the same time. There is no benefit to the industry if we do not all move together.鈥�
In his 30 years in the industry, and 25 years operating in the European environment, Douglas says he has never seen such a united opinion that the Europeans as a continent will move on the 11 October 2027.
Important to note however, is while some recommendations that were made in the British report are specific to the UK 鈥� such as the time by which you have to submit an instruction to CREST 鈥� the majority of recommendations such as the automation of stock lending, corporate actions, and settlement instructions (SSIs) are not UK specific recommendations, they are applicable market wide.
Douglas is hopeful that there will be an element of transfer between the two plans, with some of the work from the UK being reused in Europe, and vice versa. 鈥淭he UK and EU are moving forward in lockstep and each supporting the other in their journey to the finish line.鈥�
Without the alignment of market practices, as well as legal and regulatory frameworks, Sabatini warns that this could create cost, frictions, and reduced market efficiency.
鈥淲e should offer a settlement system that favours the participation of non-EU, non-UK participants on the same footing. If you have to start identifying which are the differences in terms of different regulations or market practices, this would reduce the attractiveness of our respective market compared to other markets, like the US,鈥� he explains.
Looking ahead, Douglas anticipates that keeping firms moving and avoiding complacency as the largest challenge in the next three years. While some find confidence in moving to T+1 following their own preparation for the transition to the shorter settlement cycle in the US, Douglas warns that this could be indicative of complacency.
鈥淭he only similarity between the move to T+1 in the US and the UK is the letter 鈥楿鈥� 鈥� everything else could be different until you prove to yourself that it is not,鈥� he explains.
He recommends firms go through the analytical work to satisfy themselves that what they have done is appropriate. For example, the UK does not use affirmations, therefore any work on this for the US transition is deemed to have 鈥渘o relevance鈥� for the UK.
However, he adds: 鈥淲e are bigger users of collateral, so firms need to be looking at their collateral processes. Firms need to be satisfied that what they鈥檝e done for the US implementation can be reused for the UK and European environment.鈥�
Key for Sabatini is to keep an open dialogue with all national associations. Expanding on this, he indicates that most member states have set up national taskforces to have a single view on the national specificities 鈥� which should be brought to the attention of the industry committee.
Although taking into account multiple national specificities and differences in market practice makes the process complex, Sabatini and the industry committee have set up arrangements to ensure all of the issues are identified, that they are addressed, and that the committee can provide solutions that can be flexible enough for all market participants to comply with.
In his concluding remarks, he adds: 鈥淚t鈥檚 a complex journey. It will be a bumpy road. But at the same time, we are working to make the process move along with the governance structure and the technical workstream, working together to ensure a wide participation, which should remove the risk of last minute surprises.鈥�
The debate goes back to 2014 when the first action to shorten the settlement cycle from T+3 to T+2 was implemented. At the time, the issue was raised about the need to exclude this type of transaction 鈥� repo, reverse repo, and securities lending.
Speaking to 麻豆传媒 Finance Times, Giovanni Sabatini says this type of transaction is not always connected to a specific settlement process. Repo and reverse repos are mainly used by the treasurer to adjust their liquidity position, meaning that they need sufficient flexibility.
鈥淚f firms trade a repo today, they have to set up the first leg of the transaction on T+1. They may add rigidity to the process of cash management of the treasurer that is inconsistent with the real nature of this transaction,鈥� he confirms.
As the independent industry chair, Sabatini is leading the EU鈥檚 work to facilitate the migration to a shorter settlement cycle. He acts as a link between the industry and the public sector.
Earlier this year, Sabatini sent a letter to the European 麻豆传媒 and Markets Authority (ESMA) to argue for an exemption of SFTs. In his words: 鈥淭hese transactions are like the oil in the settlement process. If you make this oil too sticky, it doesn't work in the settlement process, and it makes the settlement process more complex.鈥�
The T+1 regime is needed for outright transactions (the buying and selling of securities). This is clear in the US environment, where Sabatini says this issue is 鈥渘ot relevant鈥� because, by definition, repo transactions are out of the scope of the T+1 rule.
In Europe and in the UK however, this is not the case. The Central 麻豆传媒 Depository Regulation (CSDR) has a wider breadth, with only OTC transactions out of scope for T+1.
鈥淭oday, there is a trend of moving repos, including forward repos, on to trading platforms. If regulators impose the T+1 discipline to this transaction, the only result is that firms will move away from trading platforms and toward OTC for this type of transaction, therefore reducing the transparency of this market, which is not beneficial,鈥� warns Sabatini.
In alignment
Fully aligned on the issue, Andrew Douglas, chair of the UK Accelerated Settlement Task Force, says 鈥測ou cannot get cigarette paper between the UK and EU鈥� when it comes to the topic of the SFT exemption. The UK is working with regulators on both sides of the channel to ensure it has a similar, if not identical, outcome 鈥� a full exemption.
鈥淪FTs are the oil in the engine of finance, and if we don鈥檛 want that engine to grind to a halt, we have to ensure the smooth flow of oil,鈥� notes Douglas. Although the process to achieve a full exemption will take time, those leading the transition to T+1 are determined.
The European Commission has already put forward its proposal to amend the CSDR in preparation for the shorter settlement cycle. For the time being, the proposal has not included an explicit exclusion of SFT transactions. The process for finalising the amendments of a European directive is quite complex and long, indicates Sabatini, who hopes to find agreement with the Commission on the first proposal amendments.
For Douglas, it is imperative that market participants, and regulators, are of the same understanding. In the UK, the taskforce was built on three principles.
One is inclusivity 鈥� everybody has a voice in agreeing the result to any problem. The second is transparency, so that everybody sees what is going on. And the third is independence, so that there is zero chance that one participant constituency will be favoured over another. Those same three principles are being applied here, for the SFT exemption.
Douglas continues: 鈥淭he reality is, it addresses something that is missing from the original legislation, way back when nobody explicitly considered the impact of settlement timeframes on SFTs. So the market assumed that they were exempt although that is not stated, and essentially this is an attempt to clear that up.鈥�
According to Sabatini, the regulator鈥檚 main argument against the exemption is that, up until now, the industry has been able to manage this type of transaction 鈥� and so they are also questioning why the industry was not more vocal in 2014 with the transition to T+2.
However, in 2014, the amount of repo and other SFTs executed on the trading platform was minimal, he highlights, therefore most of these transactions were executed over-the-counter 鈥� OTC transactions were out of the scope of T+2.
He highlights a current trend which 鈥渟hould be favoured鈥�, which is the move from OTC transactions to trading platform transactions, as this 鈥渋ncreases transparency and allows for more monitoring of this activity鈥�. This presents as a core reason to now ask for a clear exemption of SFTs, so as to avoid putting a stop to this 鈥減ositive trend鈥�.
In addition, Sabatini notes that reducing the settlement cycle reduces the flexibility of the instrument 鈥� a second reason for these T+1 leaders to opt for a full exemption.
Concluding his thoughts on the possible exemption, Douglas says: 鈥淕iovanni and I are both optimistic that this will be resolved ASAP because, from my perspective, this is a distraction from the real issue, which is: are people getting ready for T+1? But I'm hopeful that, certainly by the middle of this year, this will be done and dusted.鈥�
The race to T+1
The starting gun has been fired and market participants appear enthusiastic to start the race to T+1. While firms are at different points in their journey 鈥� with some having read the implementation plan, or have allocated a budget for future work 鈥� there are those that are yet to begin. For Douglas, his role is to ensure companies jump on the bandwagon and move at pace for the 11 October 2027 deadline.
He warns that while the deadline to implement the shorter settlement cycle is two-and-a-half years away, this project began in January 2023 鈥� the endeavour is already at the halfway point.
If firms stick to the deadlines identified in the transition plan, Douglas believes it will get them into a good place to start the fine-tuning and the testing that will allow firms to get over the line in October 2027.
He explains: 鈥淚'm encouraging folks to get on with their transitions as soon as possible which I realise is a slightly different way than the way we typically operate in this industry 鈥� we tend to work right up to the deadline and then do everything at the last minute. I'm hoping we can move the industry into a different mindset as to how it addresses this particular change.鈥�
Unlike the US and UK, Europe has an additional layer of complexity, due to the market fragmentation caused by multiple jurisdictions. All member states are covered by the European legislative umbrella 鈥� CSDR. However, there are a number of specific national laws, market practices and local requirements that may have to be taken into account in the process of moving to T+1. For this, a robust framework is required.
In January this year, a new governance structure to support the EU transition to T+1 was announced.
鈥淲e have set up this governance arrangement to ensure that the process to T+1 will be sufficiently inclusive and that all the relevant parties have the opportunity to participate in the industry committee and in the technical workstream,鈥� says Sabatini.
He adds: 鈥淲e are also open to the participation of non-EU associations to be sure that we will receive inputs, comments, and suggestions from market participants, particularly those located in different time zones, because in the end, they will be most impacted by the shortening of the settlement cycle.鈥�
The technical workstreams are working at maximum speed because, as Sabatini describes, 鈥渁n ambitious deadline鈥� has been set for the release of the first set of high-level recommendations 鈥� otherwise known as the EU implementation roadmap to T+1. The roadmap is set to be delivered by the end of June 2025.
Leading the EU, Sabatini suggests that this date was selected to provide time for market participants to plan the investment needed to upgrade their systems and to increase automation 鈥� firms are planning their budgets for 2026. Furthermore, the European Central Bank, which is managing the settlement system T2S, is requesting inputs or proposals to amend timetables or operations in T2S be entered as soon as possible, due to its 鈥渃omplex internal decision-making process鈥�.
Following the release of the implementation roadmap for the EU, there will be a public consultation (through July and August). In the meantime, Sabatini and his team will work on the second set of documents, namely a more detailed implementation rulebook, which will dictate the best practices that are needed to comply with the recommendations.
Sabatini explains: 鈥淗ere we have an issue. We have to strike the right balance between being prescriptive in order to ensure certainty of behaviour, at the same time we have to be sufficiently flexible to accommodate all of the different starting points of the different participants in the market.鈥�
CSDs in different jurisdictions have different levels of automation or complexities, and the EU taskforce will need to take into account the different dimensions of market participants.
2027 will be the year to start testing the implementation. The EU task force will draft the transition playbook to identify all the needed steps to ensure that on 11 October 2027, everything will run smoothly, and then it will monitor the result of the transition.
鈥淲hile in the UK the approach is more market practice based, in the EU we are used to a more regulatory-based approach, and that requires more coordination between the industry and public authorities to be sure that we are progressing hand in hand,鈥� states Sabatini.
Hope on the horizon
As the UK, EU, and Switzerland continue on this journey, it will be imperative that each region aligns with one another to cross the finish line.
Douglas states: 鈥淚'm very confident that we will move together. In the film 鈥楲e Mans 鈥�66鈥�, Ford had a plan that all three cars should cross the line at the same time. And that's our plan, to have the three jurisdictions all cross the line at the same time. There is no benefit to the industry if we do not all move together.鈥�
In his 30 years in the industry, and 25 years operating in the European environment, Douglas says he has never seen such a united opinion that the Europeans as a continent will move on the 11 October 2027.
Important to note however, is while some recommendations that were made in the British report are specific to the UK 鈥� such as the time by which you have to submit an instruction to CREST 鈥� the majority of recommendations such as the automation of stock lending, corporate actions, and settlement instructions (SSIs) are not UK specific recommendations, they are applicable market wide.
Douglas is hopeful that there will be an element of transfer between the two plans, with some of the work from the UK being reused in Europe, and vice versa. 鈥淭he UK and EU are moving forward in lockstep and each supporting the other in their journey to the finish line.鈥�
Without the alignment of market practices, as well as legal and regulatory frameworks, Sabatini warns that this could create cost, frictions, and reduced market efficiency.
鈥淲e should offer a settlement system that favours the participation of non-EU, non-UK participants on the same footing. If you have to start identifying which are the differences in terms of different regulations or market practices, this would reduce the attractiveness of our respective market compared to other markets, like the US,鈥� he explains.
Looking ahead, Douglas anticipates that keeping firms moving and avoiding complacency as the largest challenge in the next three years. While some find confidence in moving to T+1 following their own preparation for the transition to the shorter settlement cycle in the US, Douglas warns that this could be indicative of complacency.
鈥淭he only similarity between the move to T+1 in the US and the UK is the letter 鈥楿鈥� 鈥� everything else could be different until you prove to yourself that it is not,鈥� he explains.
He recommends firms go through the analytical work to satisfy themselves that what they have done is appropriate. For example, the UK does not use affirmations, therefore any work on this for the US transition is deemed to have 鈥渘o relevance鈥� for the UK.
However, he adds: 鈥淲e are bigger users of collateral, so firms need to be looking at their collateral processes. Firms need to be satisfied that what they鈥檝e done for the US implementation can be reused for the UK and European environment.鈥�
Key for Sabatini is to keep an open dialogue with all national associations. Expanding on this, he indicates that most member states have set up national taskforces to have a single view on the national specificities 鈥� which should be brought to the attention of the industry committee.
Although taking into account multiple national specificities and differences in market practice makes the process complex, Sabatini and the industry committee have set up arrangements to ensure all of the issues are identified, that they are addressed, and that the committee can provide solutions that can be flexible enough for all market participants to comply with.
In his concluding remarks, he adds: 鈥淚t鈥檚 a complex journey. It will be a bumpy road. But at the same time, we are working to make the process move along with the governance structure and the technical workstream, working together to ensure a wide participation, which should remove the risk of last minute surprises.鈥�
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