Is 2027 too far away for T+1?

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Good morning, at Global Custody Pro we track what's happening in global custody, clearing, payments, and digital assets. We filter through industry news to bring you what matters most in clear language.

This week: Europe sets a date to speed up trade settlement, new tech rules hit EU banks, a court win for big banks over Italian swaps ISDAs, Swiss watchdogs warn on crypto risks, and data shows whales still rule in 'democratic' crypto trading.

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ESMA has assessed that shortening the settlement cycle from T+2 to T+1 will provide significant benefits for EU capital markets through reduced counterparty risk, lower margin requirements, and better alignment with other major jurisdictions that have already moved to T+1.

Their analysis shows cleared positions could be reduced by 47%, resulting in margin requirement reductions of around 42% or €2.4 billion. This would particularly benefit equity markets, which account for about 80% of the projected margin savings.

So what? It’s clear that T+1 is an urgent requirement for Europe. There are funding and ETF related issues that have continued since the US moved to T+1, yet until every major market is on T+1 a different settlement cycle will continue to cause challenges. With the rise of digital assets, it’s still unclear how long other markets will have before T+0 or atomic settlement becomes the next big thing. At least a date of October 2027 accelerates the planning cycle.

Sources: Press Release | Final Report

The European Supervisory Authorities (ESAs) have issued a Decision requiring competent authorities to report information by April 30, 2025, regarding financial entities' arrangements with ICT third-party service providers under the Digital Operational Resilience Act (DORA).

The Decision, which follows DORA's implementation on January 17, 2025, establishes a framework for annual reporting necessary for designating critical ICT third-party service providers (CTPPs), including timelines, procedures, and data quality standards.

The authorities plan to publish updated reporting requirements in December 2024 and will host a virtual workshop on December 18, 2024, to guide financial entities on register preparation and share insights from the Dry Run exercise.

So what? This marks a significant step in the EU's efforts to enhance digital operational resilience in the financial sector by creating a structured oversight mechanism for critical technology providers. Financial institutions and their technology partners will need to quickly adapt to these new reporting requirements, as the relatively short timeline between DORA's implementation in January 2025 and the first reporting deadline in April 2025 leaves little room for delay in preparation and compliance.

Sources: Press Release 

ISDA agreements are the linchpin of derivatives markets. You might remember them from the movie Big Short and their role in the Global Financial Crisis. This week Deutsche Bank and Dexia Bank won a UK High Court case against an Italian local authority, Provincia di Brescia, over interest rate swap transactions from 2006. The court ruled the swaps were valid and legally binding, rejecting Brescia's attempts to void them under Italian law. Although the swaps were performed without issue for nearly 10 years, Brescia tried to challenge them in 2015 after claiming they were speculative and invalid.

The case follows several similar disputes where Italian municipalities have tried to challenge ISDA (International Swaps and Derivatives Association) standard-form agreements in English courts. Recent cases have consistently upheld these contracts' validity under English law, despite attempts by local authorities to invoke Italian law arguments about capacity and authority.

So what? This ruling reinforces the enforceability of derivatives contracts with public authorities under English law. It shows that local governments cannot easily escape their derivatives obligations by claiming lack of authority or capacity after performing the contracts for years, particularly when they've previously settled disputes over the same transactions. The decision provides greater certainty for banks dealing with public sector entities in cross-border financial transactions, and reinforces how important ISDA agreements are as part of the derivatives markets.

Sources: High Court Judgment

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🚀 Digital Asset News

Swiss financial regulator FINMA warns of growing money laundering risks in the cryptocurrency space, noting that digital assets are increasingly used in cyberattacks and illicit transactions on the dark web. The regulator highlighted a surge in the use of stablecoins for sanctions evasion, expressing concern that crypto-active financial intermediaries without adequate risk controls could seriously damage Switzerland's financial reputation.

Cyber threats to Switzerland's financial sector intensified in 2024, with FINMA reporting a 30% year-on-year increase in successful or partially successful attacks. The regulator identified business email compromise (BEC), CEO fraud, and SIM swapping as key attack vectors, while noting that about one-third of cyber incidents involved supply chain vulnerabilities.

So what? Financial institutions operating in Switzerland face mounting pressure to strengthen both their crypto compliance and cybersecurity frameworks. For smaller institutions especially, the findings suggest an urgent need to upgrade technical defenses and enhance staff awareness, as basic email security remains a significant vulnerability point.

Sources: Risk Monitor Report 2024

A new study by the Bank of International Settlements (BIS) shows that decentralized cryptocurrency exchanges (DEXs) haven't achieved their goal of democratizing trading, with sophisticated traders controlling about 80% of liquidity despite making up only 7% of users. The research, which analyzed data from Uniswap V3, found that these traders focus on high-volume, less volatile trading pools and earn significantly higher returns than retail traders.

While retail traders make up 93% of participants, they struggle to compete effectively, with their positions earning lower returns and often losing money on a risk-adjusted basis. The study found that sophisticated traders are better at managing their positions during market volatility and employ more advanced trading strategies, including providing liquidity in narrower price ranges and adjusting positions more frequently.

So what? This research suggests that even in decentralized finance systems designed to eliminate intermediaries, economic forces naturally lead to the emergence of sophisticated specialists who dominate trading activity. This makes us wonder about the key outcome - is it price improvement and liquidity provision or retail investors being market makers?

Sources: BIS Paper