(Bloomberg) -- European markets face risks including an increase in failed trades and a loss of liquidity if the region follows the US in moving toward a faster settlement cycle, the investment community warned regulators.

Asset managers, banks and trade groups are worried that settling trades on a T+1 basis — half the time it currently takes — could potentially prove disruptive, according to a compilation of responses to the European Securities and Markets Authority published Thursday. The US is poised to make the shift in May and the Securities and Exchange Commission’s chair has urged Europe to consider following suit.

The warnings are the opening salvo in what looks likely to be a drawn-out legislative process to speed up the region’s complex market infrastructure. The EU’s financial regulation chief Mairead McGuinness has said the “question is no longer if, but how and when” the region will do so.

“Respondents have highlighted a number of operational impacts that go beyond simple adaptations,” the ESMA’s report on the responses said Thursday. There is “strong demand” for clear signals from regulators early on and for coordination with the industry, it said.

Most respondents said settlement failures will increase when moving to T+1, ESMA said. Several said T+1 could have an impact on liquidity, as market makers provide it on securities they do not hold. Repo and lending markets would have to considerably improve the way they work to return securities in time when required, the ESMA report said.

The German Finance Agency, which issues sovereign debt for the nation, said that “a smooth functioning of the interaction between the cash, repo and futures markets” in German bonds is essential. It is concerned that strains in the repo market for German bonds could hurt overall liquidity in the securities.

“German federal securities are the benchmark for the euro zone. If this market segment were to lose liquidity as a result of the shortening of the settlement period and become less attractive for international investors, this could potentially result in the European financial markets as a whole being damaged and thus losing their competitiveness and attractiveness,” said officials including Thomas Weinberg, the agency’s head of trading and issuance business, in its letter to ESMA.

Other issues raised by national and regional bodies included:

  • Finance Finland, representing the nation’s financial sector, warned a European T+1 may result in market operators no longer offering Finnish investors access to non-EU markets as the increased costs of extended opening hours may be “unprofitable.”
  • The Federation of the Belgian Financial Sector and European Central Securities Depository Association both said the challenge would be post-trade activities being compressed into shorter time frames. The latter said the time to finalize settlement would be “drastically reduced” by as much as 92%, from 26 to two hours.
  • The Italian Banking Association said major market players might need to “amend the working time shift” for some business units, which might not be feasible for smaller institutions.

“A shift from ‘normal’ to ‘late’ working hours will no doubt happen,” French bank Societe Generale SA said in its response. “Should it be really significant, then it may open the door to off-shoring/outsourcing/relocation of teams abroad and more likely in the US.”

Another theme among responses was how it would be more complex and costly to bring T+1 to Europe compared to the US. That’s because of the lack of a unified capital market in the region.

“It is misleading to look at how the US are approaching the T+1 migration, since the EU post-trade ecosystem is much more complex,” said Citibank Europe Plc, a division of Citigroup Inc., in its response. “Twenty-seven markets with varying levels of efficiency and technical capabilities, compounded by different insolvency and securities laws and different tax regimes, will require careful assessment, scoping, planning and execution.”

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