Reengineering ETF Markets for Speed and Efficiency – Blueprint for UK and EU T+1 Transformation

Synchronized Settlement: UK and EU Unite for T+1 Launch on October 11, 2027

Both the UK and EU have aligned their T+1 settlement implementation for 11 October 2027, marking a coordinated transition that will reduce settlement cycles from two business days to one. This synchronization prevents the market fragmentation that has already impacted European ETF markets since the US moved to T+1 in May 2024.

The UK’s Accelerated Settlement Taskforce (AST) has published comprehensive implementation plans with 12 critical operational actions and 26 highly recommended actions. The European Commission has proposed targeted amendments to the Central Securities Depositories Regulation (CSDR) to mandate T+1 settlement.

Market DNA Restructured: How T+1 Rewrites the ETF Playbook

The transition to T+1 settlement will fundamentally alter the ETF ecosystem, particularly affecting the relationship between primary and secondary markets. Currently, ETFs benefit from aligned T+2 settlement cycles across primary market creation/redemption, secondary market trading, and underlying securities settlement.

Primary Market Disruption – The Funding Gap Crisis: When ETF Shares Outpace Their Underlying Assets

ETF primary market operations face significant challenges due to settlement misalignment. The traditional overnight coordination window is eliminated, requiring real-time communication and processing capabilities.

When ETF shares settle on T+1 but underlying securities remain on T+2, authorised participants (APs) experience a funding gap that must be bridged through collateral posting, typically requiring 105% to 110% of the transaction value.

This misalignment creates what ESMA has termed the “Thursday Effect” – a funding gap that occurs when EU-domiciled ETF shares are issued on T+2 while constituent US securities trade on T+1. The resulting cash penalties are estimated at tens of millions of Euros per month for EU-domiciled ETFs alone.

Secondary Market Impacts

The shortened settlement cycle is expected to widen bid-ask spreads for ETFs, particularly those with global underlying portfolios. APs will likely pass increased hedging costs to investors, making ETF trading more expensive. Market makers face additional complexities in managing inventory and financing requirements.

Market Making Adjustments – Market Makers’ New Reality: Managing Inventory in the T+1 Fast Lane

Market makers must adapt their operational procedures to accommodate compressed settlement timelines. Inventory management becomes more critical as the time available for hedging and position management is reduced.

The funding requirements for market making activities increase under T+1, as firms must maintain larger cash balances to bridge settlement gaps. This is particularly challenging for cross-border market making, where currency conversion and settlement timing mismatches create additional operational complexity.

Exception handling becomes more critical for market makers, as settlement failures can cascade into broader operational issues. Enhanced monitoring systems and automated exception management become essential for maintaining market making operations under T+1.

Institutional Trading Modifications – From Overnight to Real-Time Decision Making

Institutional investors must modify their trading and settlement procedures to accommodate T+1 requirements. Trade allocation processes must be completed within hours rather than overnight, requiring enhanced automation and coordination with custodians.

The compressed timeline affects institutional trading strategies, particularly for large block trades that may require multiple days to complete under current practices. Institutions must develop new approaches to managing large positions while maintaining settlement discipline.

Cross-border institutional trading faces particular challenges under T+1, as time zone differences and varying settlement cycles create operational complications. Institutions must develop new coordination procedures and potentially pre-funding arrangements to manage these challenges.

Time Zone Complexities – Race Against the Sun: Cross-Border Trading in a Compressed World

The compressed settlement cycle significantly amplifies time zone challenges for cross-border ETF trading. European trading venues typically stop trading at 18:00 CET, with some extending to 22:00 CET, leaving only 2-6 hours for completing all post-trade processes. This contrasts with the US market’s 4.5-hour window between market close and settlement processing, creating operational pressure points for European market participants.

For Asia-Pacific investors trading European ETFs, the challenges are particularly acute. The shortened timeframe means investors in Asia must often complete FX transactions and settlement instructions during European morning hours, with limited overlap for real-time coordination. This geographic mismatch has already caused complications since the US transitioned to T+1 in May 2024, and similar issues will persist with the EU/UK transition.

FX Settlement Challenges

Cross-border ETF trading under T+1 faces severe constraints from foreign exchange settlement deadlines. The CLS (Continuous Linked Settlement) cut-off time of 6:00 PM EST creates a critical bottleneck for European ETF trades requiring USD funding. With European equity markets closing at 4:00 PM CET (10:00 PM EST), there is essentially no window for FX execution to meet CLS deadlines for T+1 settlement.

This timing constraint affects approximately 38.5% of European FX trades, representing $50-70 billion on normal trading days and potentially double that amount during volatile periods. The operational response often involves pre-funding arrangements, where asset managers must establish funding positions before trade execution is complete. While pre-funding addresses the timing constraint, it creates capital inefficiency and competitive disadvantages for smaller market participants who lack balance sheet capacity to maintain large cash positions across multiple currencies.

Analysis by CLS indicates that approximately 0.4-0.5% of settlement volume could move outside the CLS system due to T+1 constraints, increasing bilateral settlement risk and operational costs.

Pre-funding Requirements – Capital on Standby: The Pre-Funding Imperative for Cross-Border Success

Cross-border ETF trading will increasingly require pre-funding arrangements to bridge time zone gaps. Asset managers trading US-listed ETFs from European or Asian time zones must often establish funding positions before trade execution is complete. While pre-funding is not a preferred solution due to capital inefficiency, it has become necessary for maintaining settlement discipline under compressed timeframes.

The pre-funding requirement is particularly burdensome for smaller market participants who lack the balance sheet capacity to maintain large cash positions across multiple currencies. This creates competitive advantages for larger firms while potentially reducing market access for smaller players.

UCITS and CSDR Conundrum

The October 2027 move to a one-day settlement cycle forces European-domiciled ETFs to operate inside two rule-books that were written for a slower, less global market. UCITS constrains how a fund can finance the 24-hour funding gap that T+1 creates, while the CSDR Settlement Discipline Regime (SDR) magnifies the cost of any settlement slip-ups that occur inside that compressed window.

Creation orders (fund cash-long scenario) ETF shares settle on T+1, yet a portion of the in-kind basket may not settle until T+2. The fund can be left holding an outsized cash position overnight, breaching the 20% deposit cap unless that cash is swept to several banks or into MMFs before close-of-business.
Redemption orders (fund cash-short scenario) When underlying US securities settle on T+1 but fund units still redeem on T+2 (or T+3 for some distribution share classes), the portfolio is forced to borrow to bridge the funding mismatch. Crossing the 10% borrowing ceiling becomes more likely and must be reported as an “active” breach to the NCA

ESMA has so far refused to ease either limit, arguing that existing UCITS text already permits “ancillary liquid assets” and short-term borrowings in exceptional circumstances. That stance obliges issuers to engineer work-arounds rather than expect regulatory relief.

ESMA’s June 2025 advice would spare technical ETF creations/redemptions from penalties, recognising that those legs are often outside a participant’s control, but all secondary-market ETF trades remain fully chargeable. Mandatory buy-ins—if re-imposed—would oblige APs to source any missing constituents or ETF shares within seven business days, adding further funding uncertainty.

Alignment tactics for UCITS compliance

Shorten fund share settlement to T+1 where distribution channels allow, eliminating the T+2/T+3 gap.
Use overnight cash sweeps into diversified MMFs to keep each bank exposure below 20%.
Pre-arranged credit lines sized to stay within the 10% borrowing cap and repaid automatically on T+2.
Staggered (split) settlement of the underlying basket so the cash component matches the ETF share timeline.

Settlement-discipline mitigants

Affirm allocations and SSIs before 19:00 CET on trade date; late matching is the single largest source of ETF fails.
Automate stock-loan recalls by the European close to ensure securities are deliverable on T+1.
Monitor penalty accruals intra-day; decisions on whether to deliver partials, borrow or fail become economic once progressive scales apply.

Regional Implementation Challenges – Tale of Two Markets: UK Consolidation vs EU Fragmentation

UK’s Settlement Advantage: Consolidated Infrastructure Meets T+1: The UK’s relatively consolidated market infrastructure provides advantages for T+1 implementation compared to the EU’s fragmented landscape. However, cross-border trading with EU counterparts will face complexity from potential differences in operational procedures despite the synchronized implementation date.

The UK’s Accelerated Settlement Taskforce has published 12 critical operational actions and 26 highly recommended actions, emphasizing the need for enhanced automation and straight-through processing. Cross-border ETF trading will require particular attention to settlement instruction accuracy and timing to prevent failures.

EU Fragmentation Challenges – EU’s 30-CSD Puzzle: Navigating T+1 Across Fragmented Markets

The EU’s fragmented post-trade landscape poses unique hurdles for cross-border ETF settlement risk management. With over 30 central securities depositories across different currencies and varying trading hours, the operational complexity far exceeds that of the UK’s more unified infrastructure.

The fragmentation creates particular challenges for cross-border ETF trading where different CSDs may have varying cut-off times, operational procedures, and technical capabilities. Market participants must navigate multiple systems and requirements, increasing operational risk and compliance burden.

Operational Changes Required – From Days to Hours in Post-Trade Processing

Workflow Compression

The most immediate challenge firms face is the dramatic compression of post-trade processing windows. T+1 settlement reduces post-trade processing time by approximately 83%, forcing all processes that previously occurred over T+1 to be compressed into trade date. This compression affects every aspect of ETF operations, from initial trade matching through final settlement preparation.

The compressed timeline particularly impacts European firms trading US ETFs, where time zone differences create additional pressure. European equity markets typically close at 18:00 CET, leaving only 2-6 hours for completing all post-trade processes compared to the US market’s 4.5-hour window. For firms operating across multiple time zones, this often means staff must work extended hours or risk settlement failures.

Trade matching must now be completed on trade date rather than T+1, requiring real-time processing capabilities and immediate exception handling. Analysis of DTCC data shows that nearly 15% of trades were historically delivered the day after trade date, indicating these transactions would fail under T+1 without process improvements.

ETF Creation and Redemption Process Disruption

ETF primary market operations face unique challenges due to settlement cycle misalignment between ETF shares and underlying securities. This creates what industry participants call the “funding gap” problem, where ETF shares settle on T+1 while underlying securities may settle on T+2 or longer cycle.

Authorised participants (APs) must now post larger amounts of cash collateral for creation orders involving non-US underlying assets, typically requiring 105% to 110% of transaction value. This increased collateral requirement stems from the temporary funding gap that occurs when ETF settlement precedes underlying securities settlement.

The challenge is particularly acute for global ETFs, where underlying securities may trade in markets with different time zones and settlement cycles. APs face increased operational complexity managing positions across multiple central securities depositories while maintaining settlement discipline under compressed timeframes.

Analysis indicates that approximately 6.5% of primary market orders in global ETFs over the past three years would have created UCITS regulatory breaches due to settlement cycle mismatches, highlighting the compliance risk dimension of these operational challenges.

Corporate Actions Processing Acceleration

Corporate actions processing faces significant operational challenges under T+1 settlement, requiring alignment of key dates and process automation to accommodate shortened settlement cycles. Payment dates for distributions must be adjusted to ensure timely settlement and disbursement of funds, while mandatory and voluntary reorganizations require process reengineering.

The European Corporate Events Group, operating under ECB governance, has identified that traditional corporate actions processing timelines are incompatible with T+1 settlement requirements. Firms must implement automated entitlement calculations, corporate action claims processing, and tax reporting to meet compressed deadlines.

Operational complexity increases for firms managing ETFs with international underlying securities, where corporate actions may occur across different time zones and regulatory frameworks. The challenge extends to maintaining accuracy while processing corporate actions at accelerated speeds, as errors become more difficult to detect and correct within compressed timeframes.

Regulatory Compliance and Risk Management

T+1 settlement introduces heightened regulatory compliance challenges, particularly for UCITS-compliant ETFs operating under cash limits and overdraft restrictions. The settlement cycle misalignment between ETF shares and underlying securities increases the likelihood of breaching UCITS cash limits (20% maximum with any single entity) and overdraft restrictions (10% maximum).

Operational risk management becomes more complex as firms must distinguish between advertent and inadvertent regulatory breaches while maintaining settlement discipline. The compressed timeframe reduces opportunities for corrective action when compliance issues are identified, requiring enhanced real-time monitoring capabilities.

Settlement failure rates present additional compliance challenges, with ESMA reporting current ETF settlement failure rates of 7.14% that could rise without adequate preparation. Each settlement failure triggers progressive cash penalties under CSDR, creating financial implications beyond operational disruption.

Firms must implement enhanced due diligence processes focused on counterparty settlement capabilities and operational readiness, extending beyond traditional credit assessments to include operational capacity, technology infrastructure, and contingency planning capabilities.

Technology Infrastructure and Automation Requirements

The shift to T+1 demands substantial technology infrastructure upgrades across the entire ETF ecosystem. Small buy-side firms face minimum implementation costs of approximately $223,000, while large global custodians require investments exceeding $36 million. These investments are essential for handling the compressed timeframes and increased automation requirements.

Key technology requirements include enhanced connectivity through robust API connections, automated reconciliation systems, and scalable architecture capable of handling increased transaction volumes without processing degradation. Real-time processing capabilities become essential, as traditional overnight batch processing systems are inadequate for T+1 requirements.

Firms must implement comprehensive automation across the ETF lifecycle, including automated trade allocation, confirmation processing, corporate actions handling, and securities lending recalls. The technology infrastructure must integrate with multiple data sources and counterparty systems to ensure accuracy across different time zones and operational procedures.

Exception management systems require particular attention, as the compressed settlement cycle makes error detection and correction more critical. Automated monitoring systems must identify potential settlement failures in near real-time and

Actionable Implementation Steps

Phase 1: Assessment and Planning (2025-2026) – Foundation Phase: Gap Analysis and Strategic Blueprint Creation

Immediate Actions:

Conduct comprehensive gap analysis of current settlement processes.
Assess technology infrastructure capabilities and limitations.
Evaluate counterparty readiness and settlement performance.
Develop project governance structures and budgets.

Strategic Planning:

Define T+1 operating model and target state architecture.
Establish project management offices with clear accountability.
Engage with service providers and technology vendors.
Conduct regulatory impact assessments.

Phase 2: Infrastructure Development (2026-2027) – Construction Phase: Building the T+1 Technology Backbone

Technology Implementation:

Upgrade settlement systems and connectivity infrastructure.
Implement automated workflow management systems.
Enhance data management and analytics capabilities.
Develop comprehensive testing frameworks.

Operational Readiness:

Redesign operational processes for compressed timeframes.
Train staff on new procedures and exception handling
Establish enhanced monitoring and control frameworks.
Develop contingency plans for settlement disruptions.

Phase 3: Testing and Validation (2027) – Launch Preparation: Stress Testing for T+1 Go-Live

Comprehensive Testing:

Participate in industry-wide testing initiatives.
Conduct end-to-end settlement testing with counterparties.
Validate exception handling and contingency procedures.
Stress test systems under peak volume scenarios.

Final Preparations:

Complete staff training and procedural documentation
Finalize service provider agreements and connectivity.
Establish go-live monitoring and support arrangements.
Implement final regulatory compliance measures.

Specific Recommendations for Market Participants – Tailored Strategies: Custom T+1 Roadmaps for Every Market Role

For ETF Issuers – Issuers’ Survival Guide: T+0 Settlements and Enhanced Cash Management

Restructure Creation/Redemption Processes: Implement T+0 settlement for primary market transactions where possible to maintain efficiency.
Enhance Cash Management: Develop sophisticated cash management systems to handle UCITS compliance requirements.
Strengthen AP Relationships: Work closely with APs to optimize collateral arrangements and funding solutions.
Invest in Technology: Prioritize automation and straight-through processing capabilities.

For Authorised Participants – APs on the Frontline: Funding, Automation, and Risk in T+1

Expand Funding Facilities: Establish additional short-term funding arrangements to bridge settlement gaps.
Automate Operations: Implement comprehensive automation across order management and settlement processes.
Enhance Risk Management: Develop real-time monitoring capabilities for settlement exposure.
Optimize Collateral Management: Implement dynamic collateral optimization to minimize funding costs.

For Asset Managers – Asset Managers’ Playbook: ETF Selection and Trading Strategy Overhaul

Review ETF Selection: Consider settlement cycle alignment when selecting ETF investments.
Enhance Operational Due Diligence: Assess ETF providers’ T+1 readiness and settlement capabilities.
Optimize Trading Strategies: Align trading timing with settlement requirements.
Strengthen Counterparty Management: Evaluate and enhance relationships with settlement-capable counterparties.

For Market Infrastructure Providers – Infrastructure Evolution: Building the Highways for T+1 Traffic

Upgrade Settlement Systems: Invest in high-capacity, low-latency settlement infrastructure.
Enhance Netting Capabilities: Optimize multilateral netting to improve capital efficiency.
Improve Exception Handling: Develop sophisticated exception management and resolution capabilities.
Strengthen Connectivity: Provide robust API and messaging infrastructure for market participants.

Beyond Implementation: T+1 as Market Structure Game-Changer

The operational challenges of T+1 ETF settlement transition represent a fundamental transformation of post-trade processes rather than incremental adjustments.

The transition to T+1 settlement represents more than a technical change – it fundamentally alters the ETF market structure. Success requires coordinated investment in technology infrastructure, process reengineering, staff training, and risk management frameworks specifically designed for compressed settlement timeframes. Firms that proactively address these challenges through comprehensive automation, operational excellence, and enhanced risk management will be best positioned to capitalize on the benefits of faster settlement while minimizing operational disruption and compliance risks.

The implementation of T+1 settlement will ultimately strengthen market efficiency and reduce systemic risk, but only if executed with careful planning, adequate investment, and industry-wide coordination. The aligned timing between the UK and EU provides an opportunity for harmonized implementation that should minimize market fragmentation and maximize the benefits of accelerated settlement for ETF investors and market participants alike.

Let’s Start the Conversation

Onepoint is uniquely positioned to support ETF operators, asset managers, and market participants as they adapt to the operational, regulatory, and technological challenges introduced by the move to T+1 settlement in the UK and EU. Our integrated approach spans advisory, technology, and hands-on implementation, ensuring clients can manage risks, maintain compliance, and achieve operational efficiency in this new environment.

Advisory Services

Assess the impact of T+1 settlement on clients’ existing ETF operations, with a focus on cross-border settlement mismatches, liquidity management, and regulatory compliance.
Develop tailored strategies to mitigate risks associated with compressed settlement windows, such as funding gaps, FX misalignments, and NAV calculation complexities.
Advise on regulatory requirements, including UCITS rules and cross-jurisdictional compliance, to prevent breaches related to cash and overdraft limits.

Technology Solutions

Design and implement automation solutions for trade matching, allocation, and reconciliation to minimize manual intervention and reduce operational errors under T+1 constraints.
Upgrade legacy IT systems to enable real-time processing, straight-through processing (STP), and robust exception handling, ensuring timely and accurate settlement.
Deploy real-time position and inventory management tools, supporting efficient collateral management and intraday liquidity monitoring.
Integrate FX and cash flow automation to align with shortened settlement cycles, reducing the risk of failed trades and funding mismatches.
Standardize data protocols and workflows across systems and counterparties, enabling seamless communication and reducing settlement exceptions.

Implementation Support

Lead end-to-end project management for T+1 transition initiatives, from gap analysis to solution deployment and post-implementation review.
Collaborate with industry partners, custodians, and clearinghouses to implement standardized processes and best practices for cross-border ETF settlement.
Conduct operational resilience testing and scenario planning to identify and mitigate potential bottlenecks or settlement risks in compressed timelines.
Provide training and change management support to ensure internal teams are equipped to operate efficiently in the T+1 environment.

For further insights or to discuss how your institution can not only comply with the new T+1 requirements but also turn operational challenges into opportunities for efficiency and growth, please contact Onepoint