UK task force proposes excluding ETFs in event of early T+1 move

The UK could exclude exchange traded funds from the shortening of trade settlement cycles in the event it makes the transition ahead of the EU, if proposals from a government-appointed task force are adopted.

The Accelerated Settlement Taskforce has put forward its draft recommendations for the cutting of settlement cycles from two days after the trade date to one day, or T+1.

The task force recommended earlier this year that, following the US shift to T+1, the UK should follow suit no later than the end of 2027 and should work closely with European jurisdictions to see if a “co-ordinated move to T+1 is possible”.

However, the latest report considers a scenario in which the UK “migrates” ahead of the EU and Switzerland to T+1, in which event “some instruments” including exchange traded products and eurobonds would be “exempted”, remaining on T+2 until the EU moves to T+1.

Should the UK, EU and Switzerland shift to T+1 together, this would apply to all instruments covered by the Central Securities Depository Regulation, with exemptions related to ETPs and eurobonds removed.

“Recent developments in the EU suggest there is an emerging appetite for the EU to align a T+1 settlement cycle alongside the UK,” the task force report says.

Meanwhile the task force said UK-domiciled mutual funds would transition to a T+2 fund settlement cycle “concurrent with a UK capital markets transition date to T+1”.

“Where most major capital markets have transitioned to T+1 settlement, a T+2 fund settlement cycle is seen as being the optimal period for an open-ended fund to settle investor subscriptions and redemptions,” the report says.

Such a settlement cycle provides “some cash management flexibility in investing in an array of global securities and products, while minimising a potential funding gap and association costs with most global securities products settling at T+1”.

The task force added that such a shift should be a “recommendation” as opposed to a “regulatory requirement”, as some funds may focus on investment into underlying securities with a longer settlement cycle, meaning a longer fund settlement cycle “may be necessary”.

The recommendation should come from trade bodies including the UK’s Investment Association and should “target UK-domiciled funds, but language used may also include EU-domiciled funds”.