The trade associations – namely, the Association for Financial Markets in Europe (AFME), BVI (German Investment Funds Association), Bundesverband der Wertpapierfirmen (bwf), the European Fund and Asset Management Association (EFAMA) and the International Capital Markets Association (ICMA) – have released a joint statement on behalf of their members active in the EU bond markets, including the sell-side, buy-side, and financial market infrastructures.

The associations noted that distinguishing between investment grade (IG) and high-yield (HY) corporate bonds is a key component to tap into greater transparency in more liquid bonds, while ensuring protection for those bonds.

Particularly, as overly prompt dissemination of trade information could lead to a negative impact on market liquidity.

“Having a distinction between IG/HY corporate bonds allows for more tailored transparency levels for instruments with different price volatility profiles,” the trade associations said in their joint statement.

The associations highlighted sophisticated bond markets outside of the EU for calibrating transparency for corporate bonds according to the credit rating of the issuer, adding that “not adopting a similar methodology would put EU corporate bond markets at a disadvantage globally.”

As a result, policy makers have been urged to ensure that the European Union will maintain its competitiveness in the global fixed income markets, alongside preserving and potentially expanding existing liquidity in EU bond markets, which in turn will continue to ensure issuers have an effective way to finance their investment needs.

“It is clear that there are precedents for using credit ratings, not just across jurisdictions but also under other EU regulations,” added the trade associations.

Credit ratings, which has been a criterion used by TRACE in the US for years, as well as the more recent UK adoption of credit ratings through the FCA, were noted by AFME as an approach that can “provide sufficient reassurance for regulators in the EU as well […] and can help achieve the goal of competitiveness of EU capital markets with other leading global financial centres.”

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Addressing the current state of play across secondary markets, AFME highlighted that data trends demonstrated a deterioration in market liquidity as measured by turnover ratio – “calculated as annualised turnover value relative to market capitalisation”. 

Following a record low of 100% turnover ratio observed in H2 2023, the turnover ratio increased to 110% in Q1 2024, according to the ‘equity primary markets and trading’ report.

In addition, AFME also highlighted that on-venue trading accounted for the majority of total addressable liquidity in the equity space for the first quarter of 2024, as indicated by recent big xyt data.

Specifically, on-venue trading represented 74% of the total addressable liquidity, while volume traded off-venues, on systematic internalisers and pure OTC, made up the remaining 26%.

“The proportion of on-venue trading has fluctuated at around 70% relative total addressable liquidity since our records start in 2018,” added AFME.

Elsewhere, in addressing the equity trading market structure, the report highlighted the relevance of double-volume caps (DVC) and the fact that the number of instruments suspended under the DVC has experienced a decline over the last 12 months.

Read more: AFME calls on regulators to remove caps on block trading

Specifically, there were 232 suspended instruments as of March 2024. AFME however confirmed that these 232 instruments currently suspended under the DVC at the EU or trading venue level “represent 0.8% of the equity-like instruments on ESMA’s July 2023 DVC files (27,859) [and] 174 of the 232 suspended instruments have EU ISINs.”

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The taskforce filled with industry experts from across the securities services space was set up at the end of last year and had intentions to publish initial by December 2023 with a full report and recommendations will be made by December 2024. This was revised however, with the taskforce believing it could move straight to delivering a report by the end of this year. 

Sources tell Global Custodian that this is now set to be delivered in January of the New Year, with the slight delay due to some sticking points around transition dates and specifying a date. 

The initial date of the UK moving to T+1 put forward for discussion was April 2026, but the report is unlikely to specify that as a target due to a lack of consensus on achievability, sources said. 

The debate around the timeline is coming down to whether to align with the EU or not.  

Despite the UK wanting to ‘flex its post-Brexit muscles’ – as experts have said in the past – and move forward with its own timeline, there is very much still a view of the market being seen as “one location” with Europe from a trading perspective. 

Experts believe it could be inconvenient to have to different transition dates and there is a “strong lobby of firms that say ‘let’s do it as Europe plus the UK together’”, a source said. 

If April 2026 was a designated date by the UK, this would be an enormous task for the EU given the number of markets and market infrastructures involved. 

Earlier this year The Association for Financial Markets in Europe (AFME) established an industry taskforce on the move to a one-day settlement cycle in Europe.   

Its own taskforce is looking to assess two key questions: firstly, whether Europe should follow the US in the move to T+1, and secondly, if so, how and when the potential move should happen. 

At present, talk is rife about Europe potentially considering a jump straight to T+0, however multiple Global Custodian sources have voiced their disapproval for such a notion. 

In March this year, Adam Farkas, chief executive of AFME, said: “With the US having announced its intention to move to T+1 settlement by May 2024, the discussion on whether Europe should follow suit has become more pressing. Addressing this important topic will require a collaborative approach, and therefore all impacted stakeholders are encouraged to join the industry taskforce.”  

As for the UK, once the taskforce presents its report, the ultimate decision will come down to HM Treasury as they set the agenda as part of last year’s Edinburgh reforms.  

As such, the new Economic Secretary to the Treasury, Bim Afolami – who was appointed on 13 November 2023 – will be involved in the discussions going forward. He took over from Andrew Griffith who was previously Economic Secretary to the Treasury between 27 October 2022 and 13 November 2023. 

With the situation complex, a lack of clarity in Europe, a change at the Treasury position and, ultimately, different types of organisations and parties involved in the decision, there is no firm decision across the UK and Europe at present. However, for the former, there is certainly a drive to deliver structural improvements to the market and make it a more efficient and competitive market.

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In July, the UK Government announced that it had accepted recommendations from the Investment Research Review under the Edinburgh Reform, paving the way for a new ‘Research Platform’ that will provide a one-stop-shop for firms looking for research experts.

The accepted review also set the path for potentially removing the unbundling rules – an inherited EU law under Mifid II that requires brokers to charge a separate fee for research.

The reversal came as part of efforts to boost the attractiveness of the UK’s financial services sector in what could potentially be the latest divergence in regulation from the EU following Brexit.

However, panellists noted that developments in research rules should be more focused on convergence rather than divergence, to ensure research proposals benefit financial markets at large. 

“I think of research as the global golden thread. Of all the bits of the financial markets, it is the one that seems to penetrate most globally. An analysis in any one jurisdiction can be read by investors in a whole variety of them,” said one panellist. “That means that when policy happens in one bit of the world, it can affect other parts, and we’ve seen that, of course, over the years with research.”

“The challenge for firms and for associations like AFME is to try to pull together the global elements of that golden thread into coherent policy work,” added another panellist.  

The unbundling regulation, which was introduced under Mifid II, required firms to separate the cost of investment research from trading costs – with the aim of increasing transparency and reducing conflicts of interest.

However, it has been suggested that the move across Europe has led to a lack of competition in the research market, with larger providers who are able to subsidise their research department being favoured. Other knocks against the rules claim that unbundling reduced research coverage, quality and the number of analysts, as well as denting liquidity in certain stocks.

“Regulatory alignment is key for us to change anything around our processes. It’s very difficult to operate with different regulatory regimes in different geographies when you’re trying to look at an overall operating model globally,” noted one panellist. “Anything that the regulators can do in terms of aligning views, policies, rules, et cetera would be massively helpful.” 

The EU Listing Act, which was announced soon after the UK’s Investment Research Review, also included proposals for a research marketplace or research platform – suggesting some sort of convergence between the two jurisdictions. 

The proposals aim to provide a central facility for the promotion, sourcing and dissemination of research on publicly traded company and potentially open to all, but in particular for smaller companies.

“This regulatory fitness exercise that has been taking place in the EU, like in the UK, whereby our policymakers have been scanning through market evolutions and addressing the potential shortcomings of our current legislation, is absolutely key to keep rules relevant and fit for purpose,” added a panellist.

Elsewhere in the discussion, panellists emphasised the importance of keeping an eye on the detrimental effect these new proposals could have on execution quality and cost.

If rebundling were to occur and brokers tended to favour someone who chooses to bundle versus someone else who choosing to maintain a split between execution and research, this could increase cost for intermediaries and therefore the cost for an investor.

“Certainly, what we do not want is less focus on execution, which is something that we gain from the unbundling rules,” noted a panellist.

Panellists highlighted that as much as possible, regulators and authorities should be encouraged to introduce a simple, workable, non-complex change in regulation and postpone any other policy development work until the impact of that change can be assessed.

“[Whatever] platform is developed should be designed to support the production of research on all the publicly traded companies, improve the research coverage, and also trigger more market interest in smaller cap companies and liquidity in their shares,” concluded one panellist.

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In the report, which was conducted by AFME and Deloitte, the firms analyse the cause of settlement fails in the EU securities market alongside providing recommendations to improve the efficiency of post-trade processes, highlighting that addressing inefficiencies could help prepare for potential shifts to T+1 in other jurisdictions.

Europe was found to have lower settlement efficiency than other regions, though AFME highlighted that it was difficult to make a direct comparison due to significant differences in market structure, processes and standards.

The introduction of the Central Securities Depositories Regulation (CSDR) cash penalties was notably helpful in reducing settlement failures, in particular for equities, said the report. However, settlement inefficiencies remain, leading to increased costs and risks for market participants.

AFME highlighted that an improvement in data quality and standards throughout the lifecycle, in addition to the provision of more granular CSD-level data, would be critical to for the industry to identify issues and construct solutions.

“Although there is some evidence that the Central Securities Depositories Regulation (CSDR) has improved settlement fail rates, it is critical that more work is done to address remaining inefficiencies. This work becomes particularly important in the context of a potential move to T+1,” said Pete Tomlinson, director of post-trade at AFME.

“Our analysis highlights that the importance of pre-settlement matching processes is even greater in European markets than for other jurisdictions, given the differences in market structure, processes and standards.”

Among the recommendations provided by AFME, is a reduction in exemptions. The association recommends that all necessary information needed for settlement should be provided on trade date, supported by a regulatory requirement to have allocation and confirmation processes completed on trade data.

AFME recommended that firms ensure that their settlement holiday calendar is in alignment with CSDs, highlighting any potential conflicts that could result in cross-border settlement fails.

Internal processing logic should also be reviewed comprehensively to ensure economic trade data such as SSIs are up-to-date and industry SSI repositories are leveraged where possible.

AFME also recommends expediting exception resolutions, including assessing the possible adoption of a unique transaction identifier (UTI) for use in post-trade processes, as well as addressing existing gaps and inconsistencies in market standards.

Firms and providers were also recommended to establish consistent criteria and tolerances between pre-settlement matching and CSD-level matching, as well as consistent thresholds and static data throughout the chain.

Elsewhere, AFME recommended optimising settlement of available inventory including CSDs offering auto-partial settlement and hold with partial release, with intermediaries to facilitate and encourage the use of auto-partial/partial release by end users.

Increasing the frequency of settlement batches by CSDs or the adoption of real-time settlement was also recommended, with enhanced harmonisation to support cross-border settlement.

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Following the US Securities and Exchange Commission (SEC) vote to shorten the settlement cycle to one business day from 28 May next year, European regulators launched a call for evidence on 5 October to assess the impact of a shorter settlement cycle on the continent; final report scheduled for Q4 2024.

However, with regards to settlement, a number of issues remain in Europe, including relatively high settlement rates, which are now penalised under the CSDR regulation.

A panel of industry experts convened for a joint webinar from the Depository Trust and Clearing Corporation (DTCC) and the Association for Financial Markets in Europe (AFME) on assessing the current settlement efficiency landscape.

“It’s a melting pot of efficiency topics that have come together,” said Sachin Mohindra, executive director, global banking and markets at Goldman Sachs. “If we don’t get the efficiency right and move to T+1 in Europe too soon, then we might end up in a situation where we actually create more inefficiency in the process. If we try to run before we can walk, we could end up giving ourselves an injury in the process – and that’s the last thing we want to do.”

Instead, Mohindra argues, the industry should be focused on preparing the market for a shorter settlement cycle in the right way – which would be to overcome the existing challenges around settlement efficiency within the market. 

To do so, the panel agreed that there needs to be a greater understanding of what is really causing trades to fail in the market. ‘Inventory issues’ and ‘inaccurate SSIs’ barely begin to scratch the surface of the true causes, and more can be done to improve that understanding.

Rollo Burgess, director, consulting – capital markets at Deloitte, confirmed that there are currently serious moves being made to address these inefficiencies, some of which can be put down to the fragmentation in Europe. “There’s a sort of political intent to address that and a number of us were in a meeting that ESMA hosted a few weeks back and that intent was very apparent from the commission and we’re also aware that there’s focus on this in the UK as well, particularly in the context of the move to T+1,” he said. 

Mohindra also spoke to the importance of the role of regulators in improving efficiency, noting that: “The collaborative nature between the industry and the regulator is now more evident. So hopefully we can leverage that and then make European markets more efficient.” 

Other panellists also highlighted the importance of participants from every corner coming together to form a unified and integrated approach to improve settlement efficiencies.

Emma Johnson, executive director, securities services global custody industry development at JP Morgan, made very clear the importance of the entire market banding together, explaining that without a cohesive approach minimal headway would be made.

“No one group has a single answer […] I think there needs to be greater partnership between the regulators, FMIs and market participants to kind of pull all the data sources together, all the perspectives, all the families together and partner to resolve.

“Associations can lead, but members need to do the hard work and implement and find common ground. I think there’s a lot of work to do. We just started at just the start of a very long, very important journey.”

This echoes the thoughts of Barnaby Nelson, chief executive of The ValueExchange, from another AFME discussion earlier this year, wherein he asserted that the idea of setting up settlement teams for failure must be avoided, with T+1 ideally being viewed as an enterprise-wide conversation given that it is fundamentally something that affects various stages, from onboarding, to middle-office allocations, and funding.

Read more – T+1 settlement: The seismic post-trade change impacting the trading desk

Across the European securities markets, there is a continuous debate about the key roadblocks and potential solutions. Panellists at this most recent AFME and DTCC webinar reinforced the fact that there are several significant structural differences to take into account, namely the fragmentation throughout the region where differing regulations and tax regimes are the norm between jurisdictions.

Reintroducing alignment on a global level is an important conversation and requires a different game plan when comparing the US and Europe as jurisdictions consider moving to a similar structure in the future.

“It’s not a simple step, but we need to ask ourselves fundamental questions about how we redesign and rethink infrastructure, not just for T+1, but eventually maybe even for T+0,” said Mohindra.

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The call to evidence asks for stakeholders’ views as well as quantitative evidence “to form a better understanding of the issue and help ESMA produce an assessment of the costs and benefits linked to the potential reduction of the securities settlement cycle in the EU”.  

With the US making the switch to T+1 in May next year, talk of a similar switch in the EU and the UK has been rife in industry circles – with varying levels of hospitality. Some participants hail the reduced risk that a shortened cycle would bring, while a mandate for T+1 in Europe was recently described as “absolutely wrong” by Euroclear CEO, Lieve Mostrey.  

ESMA acknowledges that unlike other jurisdictions, the EU has “a complex post-trade landscape with a high number of market infrastructures (CSDs, CCPs and trading venues), several currencies, matching model, and a common settlement platform which does not support all currency denominations of the instruments traded and settled in the EU and in which not all EU CSDs participate”.  

With the feedback received, ESMA said it will consider all possibilities for a shortened settlement cycle – including both T+1 and T+0. The regulator notes that any subsequent decision “needs to be based on a proper assessment of the costs and benefits that such a change would bring to all users of financial markets in the EU”.  

Commenting on the opening of the call for evidence, Pete Tomlison, director of post-trade at the Association for Financial Markets in Europe (AFME), said it’s an important step in moving forward the debate on T+1 settlement.  

“Moving to T+1 should not only be a question of “when”, but also “why” and “how”. It is important to ensure that any decision to shorten the settlement cycle is underpinned by a robust qualitative and quantitative analysis of the potential benefits, risks and costs, and also takes account of the unique complexities of EU capital markets. 

“Any potential move to T+1 will require collaboration from a broad range of industry stakeholders, with the ultimate objective of making EU securities markets safer and more efficient.” 

The watchdog will consider the feedback during the first quarter of 2024, with the intention to publish a final report in Q4 2024 at the latest.

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The watchdog revealed that its initial focus will be on a single consolidated tape provider (CTP) for each asset class, to help ensure that associated data costs stay low while also addressing the existing fragmentation of post-trade transparency data.

A CT for bonds will be the initial focus, with an equities tape following at a later stage. The FCA also stated that it plans to run a competitive tender process for the bonds tape.

The FCA’s consultation – set out in July – provides its proposed framework for a CT for bonds, its criteria for how a CTP would operate, and the tender process for appointing a CTP.

Comments on this consolidation paper are expected to be received by 15 September, after which, the FCA stated it would make the necessary amendments to its handbook, with the aim to publish a policy statement in December 2023.

The development follows approval from the EU and Parliament earlier this year for a CT for the EU across all asset classes, alongside enforcing a general ban on payment for order flow with temporary member state exemptions.

Read more: European Council and Parliament reach milestone Mifid compromise on consolidated tape and PFOF

On Friday, the Association for Financial Markets in Europe submitted its response to the FCA’s consultation paper, welcoming the FCA’s initiative to embed the framework encouraging the development of a CT in the UK.

Echoing industry perspectives, AFME highlights that a resilient, cost-effective CT providing timely, good quality data will provide improved access to a common view of the UK market to all investors – while also enhancing the global competitiveness of UK wholesale markets. 

In AFME’s response to the FCA’s consultation paper, it highlights licensing, the tender process, governance and operating costs as the most pressing aspects to consider around the establishment of a CT.

“The establishment of a consolidated tape for bonds in the UK is a major milestone. The UK has a leading global market and it is vital to ensure that it remains competitive by widening access to market data and broadening participation in capital markets from investors, both domestically and internationally,” said Victoria Webster, managing director of fixed income at AFME.

“At the same time, even an appropriately constructed consolidated tape will not fully address the current unacceptably high cost of market data. We trust that the FCA’s extensive work on wholesale data will help address anomalies in this area, which are detrimental to financial markets and their users.”

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Panellists raised concerns over FX, settlement fails, and potential regulatory hurdles during the webinar held by AFME on 27 June.

Speaking to the key considerations for the European buy-side community, Susan Yavari, regulatory policy advisor – capital markets at European Fund and Asset Management Association (EFAMA) highlighted that identifying potential pain points is the overarching focus.

The buy-side are “aware and worried,” she said, confirming that implementation had only begun in the last few months. Yavari stressed that the principal challenges stem from the settlement mismatch of T+1 in the US and T+2 in Europe and the subsequent funding gap.

The shift to T+1 presents a growing list of operational challenges to the buy-side. Chief among those raised by the panel is the question of how much cash can be held in funds and the potential for an increased number of regulation breaches during hold ups. Other difficulties also arise from having to recall stocks in a much shorter timeframe.

Potential solutions around operational challenges include European night desks or US buildouts, however, both are potentially costly and therefore not viable options for all firms.

Specifically with regards to foreign exchange, working from a new compressed timeframe makes the market a much less attractive environment in which to source FX, Yavari explained.

The rule amendment has had operational consequences across Europe thanks to the level of interconnection between US and European securities. However, despite the forewarning there are significant gaps in levels of preparedness, the experts agreed.

Barnaby Nelson, chief executive of The ValueExchange highlighted that their studies had demonstrated significant differences between firms’ readiness.

The recent report from The ValueExchange found that only 46% of the market is on course to be ready for the shift to T+1 next March, with “investors so far not engaged”. The paper suggested that investors risk overestimating their reliance on their service providers in their efforts to prepare.

Though the speakers agreed that there had been a lot of ground made up in the last couple of months, Nelson explained that there are a portion of institutional investors who are not yet where they need to be and must move on from the scoping phase into the project phase now.

Nelson also suggested that the idea of setting up settlement teams for failure must be avoided and T+1 should be viewed an enterprise-wide conversation and fundamentally something that affects various stages, from onboarding, to middle-office allocations, and funding.

This was echoed by Emmanuelle Riess, custody product manager and Director at BNP Paribas, who expressed that preparation at all stages is the key to operating efficiently in this compressed environment.

She highlighted the importance of both downstream and upstream systems maintaining a smooth and timely flow between them in order to be successful at the end point, with all pre-settlement controls correctly executed.

Empirically, Riess confirmed that BNP Paribas is focused on “a healthy review” of its technology across these stages, looking at automation and towards removing manual tasks.

She expressed that it is the preparedness of clients, and communication with them, which are the key pillars for a successful transition to the new system.

Sachin Mohindra, executive director at Goldman Sachs added that for their clients, efficiency in middle-office processes (post-trade processing time between trading and settlement) is the main focus now whilst getting ready for the move. He highlighted that over the next few months solutions for the FX access to liquidity should be prioritised.

Following the US Securities and Exchange Commission (SEC) vote to shorten the settlement cycle to one business day back in February of this year, the market now has until 28 May 2024 until implementation.

A recent T+1 event from Xceptor found that over half (52%) of participants believe that next year’s deadline will be postponed.

Yavari highlighted that the lack of a seamless and coordinated approach to this transition since its inception was in her opinion largely down to the ‘T+1 playbook’ focusing principally on the domestic US market, suggesting that – though one third of the US equities market is owned by foreign investors – there was a fundamentally unbalanced approach to the T+1 project.

She added that the momentum from the meme stock saga in early 2021 being the trigger for T+1 being pushed through – which the DTCC are not keen to acknowledge – was arguably not the best motivation to implement a new policy.

Closing up the discussion, panellists also touched on the potential for reinstating global harmonisation in the form of T+1 in Europe, and the challenges this could present. Pablo García Rodríguez, manager, post-trade at AFME, stated that there are several significant structural differences needing to be considered before this possible move.

In particular, he called attention to the fragmentation of European markets and the distinct regulations and tax regimes across jurisdictions, explaining how reintroducing alignment on a global level would be a significant challenge as a result of the differences between the US and Europe.

Additionally, he identified the relevance of different CSD’s (Central Securities Depository) across the EU member states, highlighting that within the CSD regulatory space, cash penalties are already imposed on participants failing to settle transactions on its due intended settlement dates. Within a T+1 timeframe, these issues would just be exacerbated, he explained.

An EU T+1 taskforce has been launched with two separate work streams, according to AFME. As well as focusing on the US T+1 impact on European markets, subgroups are also reviewing whether the EU could and should move to T+1.

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The decision followed extensive debate relating to both topics, which have proved to be the most divisive during Trilogue discussions thanks to opposing viewpoints favoured by the European Council and Parliament.

Following last week’s agreement, a real-time EU-level consolidated tape for a range of assets traded in the EU will be established, including key information such as the price of instruments and the volume and time of transactions. Data from all trading platforms will be included in the consolidated tape.

However, while many market participants agree the compromise is a long-awaited breath of fresh air, others disagree. Among them is the Association of Financial Markets in Europe (AFME) that has noted that some aspects of the deal are likely to lead to suboptimal outcomes due to the lack of clarity on the inclusion of pre-trade data.

While last week’s compromise made no mention of the inclusion of pre-trade data, several sources told The TRADE that the agreement includes an anonymous EBBO with no attribution to venues, as well as real-time fully attributed post-trade data. However, this is unconfirmed.

“AFME in particular regrets that the determination to create an ambitious, real-time equity consolidated tape with sufficient pre-trade information has been lost through the negotiations,” said Adam Farkas, chief executive of AFME. 

“This was an opportunity to create a single, worldwide window to the equity market in the European Union and to reduce the costs of market data, which has been a long-standing issue in assessing Europe’s competitiveness.”

Farkas labelled the decision as a “missed opportunity” for developing the Capital Markets Union, while also stating that the co-legislators failed to appreciate the fast-evolving nature of financial markets in Europe and globally in the detailed rules regulating fixed income markets in level 1 legislation.

Elsewhere, relating to fixed income, AFME stated that a lack of evidence corroborating the changes to post-trade transparency exists – in particular, that maximum deferral periods are codified in the Level 1 framework. The association noted that a greater use of delegation to ESMA for the purpose of evidence-based calibration would have been more appropriate.

The industry association also highlighted concerns that the inflexible nature of the deferral framework in level 1 will hinder the EU from having the agility to respond to evolving regulatory changes in third country jurisdictions or to adapt under stressed conditions.

Alongside the tape compromise, regulators also introduced a general pan on payment for order flow (PFOF), with the possibility for a member state where PFOF is currently allowed to offer firms in its jurisdiction an exemption – which will eventually be phased out by 30 June 2026. A decision that has been largely welcomed by participants.

“I’ve long argued that a PFOF ban is the correct course of action. PFOF is able to finance the illusion of free trading by turning the retail investor into the product,” Daniel Schlaepfer, president and chief executive of Select Vantage Inc., told The TRADE.

“All eyes now turn to the SEC, whose new market structure reforms seek to mitigate the negative externalities of PFOF through a set of complex auction rules instead of simply following first principles and banning the practice outright. Perhaps the EU’s decision will give them pause for thought.”

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