Shock UK Proposal: ETFs Facing Exclusion in Early T+1 Shift

Are you ready to stay in the loop and receive free updates directly to your inbox? Well, look no further than the Exchange Traded Funds myFT Digest! The UK is considering excluding exchange traded funds from the shortening of trade settlement cycles if it transitions ahead of the EU. Let’s dive into the details of the proposals put forth by the government-appointed Accelerated Settlement Taskforce.

1. Transition to T+1 Settlement Cycle:
   • The task force recommends moving from a two days after the trade date settlement cycle to one day, or T+1.
   • Following the US shift to T+1, the UK is advised to make the transition by the end of 2027 and collaborate with European jurisdictions for a possible coordinated move to T+1.
   • In the scenario where the UK migrates to T+1 before the EU and Switzerland, certain instruments like exchange traded products and eurobonds would remain on T+2 until the EU shifts to T+1.
   • If the UK, EU, and Switzerland synchronously transition to T+1, all instruments under the Central Securities Depository Regulation would be affected, with exclusions related to ETPs and eurobonds removed.
2. Settlement Cycle for Mutual Funds:
   • UK-domiciled mutual funds are expected to move to a T+2 settlement cycle alongside a UK transition to T+1 in the capital markets.
   • Most major capital markets have adopted a T+1 settlement cycle, yet a T+2 fund settlement cycle is deemed optimal for open-ended funds to settle investor subscriptions and redemptions.
   • This settlement cycle offers cash management flexibility while minimizing funding gap and associated costs with global securities settling at T+1.

The task force emphasizes that the shift should be a recommendation rather than a regulatory mandate. It acknowledges that some funds may require a longer settlement cycle depending on their investment focus. The recommendation should be spearheaded by trade bodies like the UK’s Investment Association, targeting UK-domiciled funds with the possibility of extending to EU-domiciled funds.

In conclusion, the landscape of trade settlement cycles is evolving, and it is crucial for the UK to strategically navigate these changes. By considering the recommendations of the Accelerated Settlement Taskforce, the UK can ensure a smooth transition while staying aligned with global market trends. Stay informed, stay proactive, and stay ahead of the curve in the world of exchange traded funds and settlement cycles.