T2S vs. Non-T2S: Europe's Two-Speed Race to T+1
KEY HIGHLIGHTS
- Europe's T+1 transition is a "two-speed race" — T2S markets benefit from existing harmonization, while non-T2S markets face greater infrastructure and liquidity challenges
- Non-T2S markets face a steep climb, requiring core system modernization to support partial settlements and new liquidity management strategies to offset the lack of auto-collateralization
- Broader success hinges on industry-wide collaboration and adaptive strategies to bridge the gap across Europe's fragmented market infrastructures
While Europe's move to T+1 settlement by 2027 promises greater efficiency, the path is fractured. The continent's division between TARGET2Securities (T2S) and non-T2S markets creates a complex landscape of diverse challenges and shared struggles. To date, adoption of T2S has been mixed - 24 CSDs in Europe are settling their trades using T2S, 1 but a number of financial market infrastructures (FMIs) remain outside of it.
T2S Markets: A Head Start, But Not a Free Pass
“The overriding objective of T+1 is to bring about greater harmonization of settlement processes. T2S already provides a high degree of harmonization across the participating CSDs and their members,” according to Alexia Kazakou, Director, Global Product, Transaction Management, Investor Services, Citi.
T2S’s automation benefits, its in-built liquidity and settlement optimization capabilities, and integrated DVP settlement model, have put members on a strong footing, but this does not mean that their T+1 transition will be straightforward.
Firstly, the architecture underpinning T2S is more than 15 years old now, so members need to assess whether their technology stacks are compatible with T+1. Although T2S has improved standardization in some areas, local idiosyncrasies still persist. Certain functionalities, such as partial settlement, asset servicing and reporting are not harmonized across T2S CSDs - issues which could create challenges in a T+1 environment.
T2S is currently delivering high standards of settlement efficiency, but it cannot prevent trade fails caused by say, a lack of inventory or cash. Analysis by Firebrand Research found that T2S members paid penalties totaling EUR 70.43 million each month in 2024 for settlement fails,2 and this will likely get worse when T+1 arrives.
While T2S markets grapple with modernizing a harmonized platform, non-T2S markets face a more fundamental set of challenges, starting with the capabilities of their core infrastructure.
The Uphill Climb: T+1 Challenges for Non-T2S Markets
Moving to T+1 is going to be just as operationally complex for non-T2S members as it will be for T2S members.
There are four key areas where non-T2S markets could run into difficulties with T+1.
- Mind the Gap: The Race to Modernize CSD Functionality
- The Liquidity Challenge: Life Without Auto-Collateralization
- Racing the Clock: Aligning Europe's Settlement Timetables
- The 'Gating Event': A Safety Valve for Repo Market Liquidity?
1 ECB – What is T2S?
2 Firebrand Research – June 2025 – Tackling post-trade friction: Supporting a global shortened settlement cycle
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