This article is the second part of our eSM series exploring settlement risk in OTC energy markets. It focuses on operational readiness for faster settlement, including:
- Why traditional M+20 settlement cycles are becoming unsustainable
- The operational barriers to accelerated settlement
- How eSM enables earlier dispute resolution and risk reduction
- What accelerated settlement means for liquidity and utilities.
Energy markets operate in real time. Settlement does not.
While power grids rebalance every 15 minutes and prices respond instantly to weather and demand, wholesale energy settlement in Europe still relies on monthly payment cycles designed for a different era.
This disconnect is becoming increasingly costly.
The Hidden Cost of M+20 Settlement
Under standard EFET terms, OTC energy contracts settle on the 20th of the month following delivery. In practice, this means credit exposure can extend up to 50 days.
For sellers, this creates:
- Extended unsecured principal exposure
- Higher capital consumption
- Increased sensitivity to counterparty default.
At a system level, it amplifies systemic risk - particularly during periods of volatility such as the 2022 energy crisis, triggered by geopolitical shocks and extreme power and gas price volatility, which placed unprecedented strain on margining, liquidity, and settlement processes across European energy markets.
Why Accelerated Settlement Is Inevitable
Other financial markets have already moved to shorter settlement cycles. US securities now settle on T+1, reducing counterparty exposure and capital requirements.
Energy markets face the same economic logic. However, accelerated settlement is not simply a contractual change - it is an operational transformation.
You cannot move to daily or near-real-time settlement if settlement data itself is still reconciled manually at month-end.
The Operational Bottleneck
Most settlement failures are not caused by insolvency. They arise from:
- Volume mismatches
- Late adjustments
- Manual data aggregation
- Disputes identified too late.
In high-volume power markets, these issues compound quickly and increase both operational and liquidity risk.
eSM as an Enabler of Faster Settlement
eSM enables automated, early-stage matching of settlement data between counterparties. Instead of discovering discrepancies weeks after delivery, issues are identified while they are still small, solvable, and operationally cheap.
Critically, eSM:
- Shifts dispute resolution upstream
- Reduces settlement uncertainty
- Improves confidence in shorter settlement cycles
- Provides the operational discipline required for T+n or T+1 models.
Without eSM, accelerated settlement increases risk. With eSM, it reduces it.
The Liquidity Reality for Utilities
A key structural challenge remains: utilities typically collect revenue from retail customers on a monthly basis. Paying wholesale energy daily would create a significant working-capital gap.
Accelerated settlement therefore requires:
- New liquidity management strategies
- Intraday funding capabilities
- Better alignment between wholesale and retail cash cycles.
This is not a reason to delay change, but a reason to approach it deliberately.
A Structural Shift, Not a Trend
The move toward accelerated settlement is not optional. It is the logical response to a digitised, renewable-heavy energy system.
eSM is not the destination. It is the operational foundation that makes the future of settlement possible.
Preparing for accelerated settlement requires more than contractual change, it demands operational readiness. Fidectus works with energy market participants across Europe to support EFET-aligned electronic Settlement Matching, underpinned by ISO-certified processes designed to meet enterprise-grade operational and security requirements.
Find out more about Settlement Hub here.