Europe is now in a ‘when not if’ situation when it comes to its plans to shorten its settlement cycle, as confirmed by the European Commission in January earlier this year.

In their statement, the AMF and Banque de France have suggested a two-pronged approach as “the most pragmatic way forward”.

The first step is a prerequisite to the second and will involve all trades being confirmed/allocated “as soon as practicable and no later than on trade date”.

The industry will be responsible for ensuring improvements in standardisation and common market practices in the EU such as market infrastructure cut offs and settlement of cross border transactions and ETF shares.

As part of step one, the T2S operator must be offered sufficient time to prepare for the settlement of an increased volume of trades during the real time settlement period, as well as for the postponing of the night batch settlement.

The pair confirmed that in order to ensure step one is completed, the European Commission should launch working groups with all stakeholders.

Step two is dependent on step one – wherein if the level of transactions confirmed/allocated on trade date is deemed as ‘sufficient’ then the settlement cycle could be reduced to T+1.

In the event of this happening, the AMF and Banque de France have suggested that rules should be carefully designed to ensure the continued attractiveness of European instruments to foreign investors.

The pair said this two-pronged approach would allow Europe a sufficient observation window to learn the necessary lessons from North America’s shift to T+1.

“Even if these markets are not fully comparable with the EU markets, it will be interesting to observe the impact,” said the pair in their proposal.

As part of their paper, the AMF and Banque de France have also tabled other methods for achieving T+1, such as leveraging the best execution or additional settlement costs of US processes to “go beyond setting up a mandatory cap and find incentive measures or tools” or the transitional measures used to implement the CSDR cash penalties mechanism.

A united approach

Coordination between the UK and Europe has been routinely flagged by stakeholders from across the industry.

The current misaligned nature of the global settlement regime has unearthed several market nuances that participants are now trying to navigate in the best possible manner.

One such theme noted by traders is the Thursday conundrum. Given that the settlement cycle is now shorter in the US trading volumes on a Thursday have dropped off significantly thanks to funding requirements that require brokers to fund a position for an additional three days on Friday, Saturday and Sunday given the slightly longer settlement cycle in Europe, the UK, and most of Asia Pacific.

Thursday volumes have been noted as “muted” thanks to what some are claiming is an extra five basis point charge on trading for orders made on that day thanks to broker funding requirements over the weekend.

While the UK is a less complex market and a shift to shortened settlement cycle could be achieved on a quicker time scale than Europe, UK regulators have slowed immediate plans for the shift following calls from participants that issues around misalignment would simply be repeated.

The AMF and Banque de France have suggested a coordinated approach with the UK and the UK Accelerated Settlement Taskforce.

“Given the interdependencies between these two markets and the ambitious timeline put forward in the UK report, such a coordination should start as soon as possible,” they said.

The UK put together a taskforce in 2022, releasing its first report in March this year which confirmed that the UK should move to T+1 no later than December 2027. Its final report will be published at the end of this year.

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Autorité des Marchés Financiers (AMF) carried out the analysis of the initial impact of the regime on just over 500 shares on Euronext Paris, including CAA40 stocks.

It found the effects of the tick size rules were positive overall with less messages to create noise in the market, increased traded volumes and an increase in quantity available at best limits.

“It reveals a sharp increase in depth and a significant reduction in the number of messages sent to the market, at the cost, however, of a widening of the spread for the most liquid securities,” the analysis said.

“The outcome for market participants is a slight additional cost that is offset by the benefits of noise reduction and the increase in the quantity available at the best limits. For small caps, implementing appropriate tick sizes…resulted in a more dynamic order book and, above all, a sharp increase in traded volumes.”

European authorities introduced a harmonised tick size regime under MiFID II, although it proved to be controversial with certain market participants claiming it was put in place to control high-frequency trading (HFT) flow and activity.

The AMF’s study suggests the positive effects of the regime only concerns orders of non-HFT participants, with a decrease in market share seen across HFT firms.

HFT market makers’ share of the depth and traded volumes decreased for securities with an increased tick size, compared to securities where the tick size where market share remained the same.

The AMF said this suggests that increasing tick size allows more players to place orders at competitive prices in the order book, while HFT market makers fail to offset the competition of the other players at the best limits by gaining a better position in the queue.

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Authorities in France and Singapore have signed a cooperation agreement to boost innovation and FinTech in both regions.

It will allow authorised FinTech companies from both countries to improve their understanding of regulatory requirements in each region to help trades and flows across each others markets.

The Monetary Authority of Singapore (MAS), the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and the Autorité des Marchés Financiers (AMF) all signed the agreement.

It also provides a framework under which ACPR, AMF and MAS can share information about emerging FinTech trends and regulatory issues, and explore potential joint innovation projects.

Ravi Menon, managing director at MAS, explained the cooperation agreement underscores the commitment from all involved to promote innovation in financial services.

Gérard Rameix, AMF chairman, added: “Cooperation between our authorities will create significant synergies for the two markets and greater understanding enabling FinTech firms to extend their global reach and learn from their foreign counterparts.”

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Exchange-traded fund (ETF) liquidity remains a risk despite the recent boom in activity, as it is tied to underlying securities and relies on the role of market participants, according to the French regulator.

The Autorité des marchés financiers (AMF) explored ETF risks in its latest research report and explained the recent growth in their popularity calls for vigilance regarding the underlying markets associated with ETFs.

“An ETF’s liquidity is ultimately tied to that of its underlying securities and relies heavily on the key role played by the authorised participant. A major event affecting most or all of its underlying market segment can lead to trading halts on both the secondary and primary markets,” the report said.

The AMF warned if investors’ interest in ETFs is supported by low interest rates, “heightened vigilance” is required due to the potential excessive influence of passive management.

“Particularly in stressed markets, when ETF unit prices are likely to show a significant discount and the effects of correlation could further exacerbate volatility on the underlying markets,” the AMF explained.

The report also found the circuit-breaker mechanism in place on Euronext Paris limits the risk of a massive divergence between the traded price of an ETF and the indicative net asset value of the underlying basket.

The ETF market has seen rapid growth over the last few years, with global assets invested increasing annually by 20% over the past four years.

ETFs now account for more than €2,850 billion in assets under management, or 7% of all collective investment assets globally. 

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A French regulator has said large international banks have already undertaken due diligence to set up subsidiaries in Paris, following the UK’s EU referendum result.

Speaking to BBC Newsnight, Benoit de Juvigny, secretary general at financial watchdog, Autorité des Marchés Financiers (AMF), explained many companies have informally inquired about setting up in Paris and leaving London.

“But in other cases, especially regarding large international banks… they are already taking real due diligence and we’ve received a lot of practical questions regarding the way they are going to be managed, from our perspective, their relationship with the French regulator,” he added.

Juvigny added that he is very interested in doing business with new British financial entities and if he could do more business with them, he would “be very pleased”.

He said the AMF will also likely expand in the wake of Brexit to deal with the demand from companies looking to move Paris.

Juvigny also described the process for companies as a “welcome challenge”, but a dangerous one because “we could see some kind of new competition between different countries and different regulators.”  

BBC Newsnight reported several countries, including Frankfurt, Dublin, Madrid and Amsterdam are also actively pursuing financial businesses based in London. 

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