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The UK Treasury and the financial regulator will have to make the final decision on whether a planned shortening of trade settlement times should follow the US or align with the EU after a government-commissioned report found deep divisions within the City of London.
The study — which was compiled by a task force headed by Charlie Geffen, a senior adviser at consultancy Flint, and which has not yet been published — is set to shy away from setting a firm date for implementation after an industry dispute could not be resolved, according to three people familiar with its contents.
It was commissioned by the Treasury as one of the UK government’s so-called “Edinburgh reforms” — a 31-point plan by chancellor Jeremy Hunt to explore ways to make London a more attractive market for international investors after Brexit.
The task force, comprising specialists and City trade associations, was set up to look at whether to cut the current window of two days to next-day settlement.
This unglamorous activity, whereby share and bond trades are finalised and ownership is legally transferred, was thrown into the global spotlight by the meme stock craze in 2021. Brokers such as Robinhood were forced to stop full dealing in stocks such as GameStop as it struggled to keep up with the pace of trading, leading to complaints that the two-day window held up customers’ money for too long.
The US and Canada will both shift to next-day settlement in May. However, the EU is still at the start of a market consultation. With the City of London populated both by businesses with US interests and by those tilted towards Europe, the UK has been caught in the middle.
The government had originally requested a progress report by the end of 2023 and a final report a year later. Geffen’s report, delayed after disagreements in December but due imminently, will now be the final version, the Treasury said earlier this year.
The task force is set to provide a suggested timeframe rather than a firm cut-off date. This would be a “compromise because no one agrees”, said one of the people who had seen the report.
“We will publish the report in due course,” said the Treasury. Geffen declined to comment.
A decision over an implementation date will be made by the Treasury with input from the Financial Conduct Authority. The Treasury is expected to use a statutory instrument to set the date, a fast-tracked legislation that allows the rules to come into effect in a shortened timeframe.
The report is expected to suggest that a 2026 timeline is possible for implementation, the people said. This is to give the UK market enough time to watch the US’s shift to single-day settlement play out, they added, and allows enough flexibility to take the EU’s decision into account.
Some analysts and banks have cautioned that the switch, which will rely on sweeping technology updates, will probably cause an increase in settlement failures as traders struggle to meet a shorter deadline, particularly for trades that cross big differences in time zones.
Banks and fund managers executing deals across borders will also have to handle the mismatch with foreign exchange settlement times, which typically takes place over two days.
A report last week by Firebrand Research found that the industry had spent $915bn in the past decade on penalties for failed trades, with the numbers rising in volatile market conditions.
Ellesheva Kissin is a reporter at Banking Risk and Regulation, a service from the Financial Times
