Impact of global momentum toward T+1 settlement on Luxembourg

In today’s fast-paced financial environment, the efficiency of settlement processes is increasingly critical. Traditionally, securities transactions have followed a T+2 settlement cycle, meaning trades are settled two business days after execution. However, the industry is undergoing a major transformation with the global shift toward T+1 settlement, where transactions settle just one day after the trade date. 

Global Momentum Toward T+1 

Several countries have already adopted or announced plans to transition to T+1. Notably, the United States, Canada, Mexico, and Argentina implemented T+1 settlement in May 2024. 

In Europe, the European Securities and Markets Authority (ESMA) has proposed shortening the settlement cycle from T+2 to T+1, with implementation scheduled for 11 October 2027. The UK and Switzerland have also aligned with this timeline. 

Luxembourg’s Position and Implications 

Luxembourg currently adheres to the T+2 standard, in line with the broader EU framework. However, as global markets accelerate, the limitations of T+2 have become more apparent. A shift to T+1 is essential to avoid market fragmentation and cost inefficiencies caused by misaligned settlement cycles. 

The CSSF issued a communiqué on 9 July 2025 drawing the industries attention to the High-Level Roadmap published on 30 June 2025 by the EU T+1 Industry Committee, convened by ESMA, the European Commission, and the European Central Bank. This roadmap outlines key actions, milestones, and dependencies to support the transition. A public consultation, hosted by ESMA and open until 31 August 2025, aimed to gather feedback from market participants. Related outcomes are expected to be published shortly and will provide further implementation and operational guidance. 

Operational and Technological Challenges 

Transitioning to T+1 will require significant changes across the entire settlement chain—from trading venues to asset managers, custodians, and intermediaries. Key areas of impact include: 

• Workflow redesign and improved data management 
• Enhanced communication channels between market participants 
• Investment in real-time processing and potentially blockchain technologies 
• Strengthened risk management and contingency planning 
• Comprehensive staff training to adapt to the new framework 

Key Areas of Impact 

The move to T+1 will affect several operational domains: 

• Operations: Reconciliation and settlement must occur within tighter timeframes, increasing the risk of errors and penalties under the CSDR regime. A full redesign of processes, including integration with external parties, may be necessary. 
• Corporate Actions: Voluntary actions will require faster decision-making and execution. 
• Collateral Management & Securities Lending: Shortened time horizons will necessitate same-day operating models. 
• Legal Documentation: Trading agreements must be updated to reflect new time constraints. 

Addressing the “Funding Gap” for Investment Fund Managers 

A major challenge arising for Investment Fund Managers specifically is the funding gap. Such gap is caused by a misalignment between fund assets and liabilities when securities settle on T+1 but fund/ETF shares settle on T+2 only. Such misalignment may lead to strained liquidity, increased operational and financing costs and investment compliance breaches. Furthermore. it may compress the post-trade lifecycle, affecting NAV production, FX hedging, and reconciliation processes.  

ETFs are particularly vulnerable due to the need to coordinate underlying basket trades with ETF share settlement.  

To mitigate these risks, ESMA, CSSF and ALFI have issued recommendations on cash breaches, penalties, and borrowing limits. 

Industry Outlook 

Further investment in automation and post-trade process improvements will be essential to prevent increased settlement failures and associated penalties. Larger asset managers and servicers may be better positioned to absorb these costs, potentially accelerating industry consolidation trends. 

On the positive side, full alignment to T+1 will help eliminate liquidity mismatches caused by differing settlement cycles. For example, when EU funds (T+2) invest in US securities (T+1), excess cash balances may breach investment rules. Harmonizing cycles will resolve such issues. 

However, shorter post-trade windows will remain a challenge. Success will depend on eliminating manual processes and implementing robust straight-through processing (STP) environments with real-time monitoring, exception handling, and automated alerts.