The Price of Precaution: The EU’s T+1 Settlement Inertia

The most basic purchase of a stock, starting with a simple computer click, involves dozens of cascading steps, or checkpoints, required to ensure trade execution, clearance and settlement. Each checkpoint involves numerous intermediaries, from the stock exchange through the Central Counterparties (CCPs) up to the Central Securities Depositories (CSDs), which centralize the custody of securities and enable the final transfer of ownership. The checkpoints were designed to ensure reliable trading and systemic stability by reducing credit and counterparty risk, but these benefits come at the cost of time.

The cost of T+X settlement, when X is expressed in days:

In our digital world, where information travels at 186,000 miles per second, it is strange that the unit of account used to express the duration of the trade settlement cycle is not seconds, minutes or hours but entire days after the trade date (T). Settlement took T+5 days in the eighties, T+3 in the nineties. Some regions of the world still function at T+2 today, such as the European Union (EU), but all are converging to a T+1 delay (the official U.S. delay since May 2024 for most transactions). Yes, there is clear progress over time, but in an environment where prices are updated every thousandth of a second, the frictions generated by a single trade remain high.

First, a trade that is not finalized locks the asset and the capital used to buy it. The seller cannot use the cash for other opportunities, and the buyer cannot resell the stock right away. If, in practice, investors find workarounds so they can prefund trades or presell assets, the workarounds all generate costs. Meanwhile, cash and assets are locked away from market opportunities as long as the trade isn’t cleared.

Also, the longer a trade takes to settle, the longer both buyers and sellers are exposed to the possibility that their trading partners might default before the exchange is finalized. This risk is made worse because the price of the traded asset may vary during that time. These counterparty and market risks justify consequent margin requirements by clearinghouses: more cash being locked away from investors, forced to stay idle while the trade is being confirmed. Shortening the settlement cycle not only reduces the delay during which all this capital is locked, but also lowers the required amount to begin with as the market and counterparty risks are reduced.

Measured effects:

The National Securities Clearing Corporation (NSCC), the CCP for the U.S. market—managing risk by guaranteeing trades and maintaining a clearing fund to cover potential defaults—monitored a 30% decrease in its clearing fund ($3.7 billion USD) after the U.S. moved to T+1 settlement. The European Securities and Markets Authority (ESMA), the EU securities regulator, foresees a proportionally bigger decrease of 42% (representing 2.4 billion EUR) if and when the EU switches to T+1.

The E.U.’s inability to move to a T+1 settlement cycle doesn’t just impose opportunity cost. The switch of its most important counterparties to a T+1 settlement cycle induced a misalignment tax: The EU market has to manage securities both in T+2 and T+1 for its cross-border activity, thereby increasing administrative costs. Moreover, an important liquidity mismatch is generated: When an EU-based fund buys U.S. securities, it must provide the cash by T+1, while the settlement of the investment fund’s own shares in the EU still occurs by T+2. This gap of at least one day forces funds to secure extra cash to cover the timing difference. The gap is worsened on Thursdays because the fund must settle with the U.S. on Friday while not receiving its subscription or redemption proceeds before the following Monday. ESMA consequently measured a decline in liquidity of EU exchange-traded funds invested in U.S. equities following the U.S. progress to T+1.

Although the EU led the U.S. by three years in the move to T+2 (2014 versus 2017), it is now lagging in T+1 implementation. This delay persists despite the known benefits of shorter cycles and the cost of market misalignment.

Comparing the quick U.S. switch to T+1 with the lagging EU approach demonstrates a stark difference. The EU process is riddled with administrative burden, incessant impact assessing and task force assembling.

Quick overview of the U.S. process:

The 2021 GameStop short squeeze revealed how the T+2 settlement cycle creates bottlenecks during periods of extreme volatility. During the event, the price of GameStop (GME) rose nearly 1,000% in a single week, dramatically increasing the “volatility component” of the risk that clearinghouses had to manage.

Because two days of trading remained unsettled at any given time, the NSCC was exposed to a massive amount of counterparty risk. To mitigate it, the NSCC issued emergency margin calls to member firms. Robinhood alone was required to post an additional $3 billion in collateral in a single morning. Because many retail brokerages lacked the immediate liquidity to meet these multi-billion-dollar demands, they were forced to restrict their customers from buying the stock, which effectively halted market activity to prevent a systemic default.

This crisis triggered an immediate reaction from U.S. institutions seeing that the T+2 settlement cycle was a source of systemic fragility. By February 2021, the Depository Trust & Clearning Corporation (DTCC) had published a white paper arguing in favor of shortening the cycle. It quickly became clear to most market participants that cutting the settlement time in half was the most effective way to lower the risk per trade across the entire ecosystem.

Following an April 2021 partnership between the DTCC, the Securities Industry and Financial Markets Association, and the Investment Company Institute that created a technical road map by December of that same year, the SEC formally proposed the rule change in February 2022, and it was adopted by February 2023. A year-long testing phase culminated in the system-wide implementation of T+1 on May 28, 2024. It took three years.

Quick overview of the EU process:

Since the beginning of the 2020s, the idea of shortening the EU’s settlement cycle was present in different reports, but the trigger point for any kind of institutional attention was the U.S. announcement of its switch. In September 2022 the Association for Financial Markets in Europe released a first white paper dedicated to T+1 settlement. Almost a year later, ESMA launched a call for evidence around T+1. In November 2024, ESMA finally conceded the necessity of a switch. In February 2025, the EU Commission drafted a regulation proposal. The proposal then had to be negotiated by the European Council and parliament, which led to a lightly amended provisional agreement. In September 2025, both institutions definitively voted in favor of the regulation. Officially published on 14 October 2025, the regulation itself imposes a deferred entry into force on 11 October 2027. It took seven years.

It should be noted that this deferred entry into force was mandated by the private sector, in the name of precaution, to ensure a smooth transition. More realistically, incumbents were reluctant to pay the investment costs of a T+1 switch and feared the risk of competition during the implementation process. Unsurprisingly, established firms fear being displaced by new, tech-driven actors whose ability to implement T+1 more efficiently could reshuffle the market’s competitive landscape. This postponement basically grants a risk-free, comfortable innovation timeline for incumbents and discourages smaller, younger entrants who lose the incentive to innovate, the regulation ensuring that larger players will have reached technological parity before the market officially opens.

In such an institutionalized system, business appears more like a rent distribution negotiation with EU institutions than an actual competition between service providers. Sometimes, surely only sometimes, it does feel like the precaution principle isn’t so much for consumer protection as for incumbent comfort.

Does late for T+1 necessarily mean late for T+0?

This waste of time is too costly. With global T+0 settlement already on its way, the EU cannot afford to be late again.

It should be noted that in 2015, the European Central Bank launched its Target 2 securities platform (T2S), a common infrastructure already capable of settling cross-border trades with central bank money in real time. Despite this technical availability of T+0 for over a decade, T2S remains underutilized, notably due to persistent market fragmentation. Because participation is not harmonized, several EU member states continue to operate national legacy settlement systems in parallel, adding redundancy and compliance costs for participants (settlement is 2 to 4 times more expensive in the EU than in the U.S.). T+0-worthy infrastructure was deployed a decade ago, yet T+2 remains the standard.

The EU is a knowledgeable and capable body, fully aware of the stakes, advantages, drawbacks, challenges and solutions for an effective common capital market. But the task of reaching a 27-state consensus, combined with systemic risk aversion and an exhaustive consultation process with interest groups (often working as a mechanism for legacy actors to delay high-cost transitions and kill competition), paralyzes progress in such a way that even a politically noncontroversial reform like the T+1 switch has to take more than twice as long as it did in the U.S. This branded precaution costs.