Matsuba Natsumi, Director, Head of FX Trading and Portfolio Management, Russell Investments.

This article was produced by Russell Investments as part of their valued industry partnership with Fund Operator.

The background

In February 2023, the Securities and Exchange Commission (SEC) adopted final requirements for a 28 May 2024 implementation date for the move to T+1 settlement for transactions in US cash equities, corporate debt, and unit investment trusts.

The Canadian securities markets will follow suit and adopt a T+1 settlement come 27 May 2024 – a day prior to US securities, due to their three-day Memorial Day holiday. 

In Q2 of 2024, the decision to implement this change will be finalised.

How does this impact trickle into FX?

The shift to T+1 will represent a shortening of execution and delivery time for market participants and present additional challenges, especially for those who do not operate and invest in USD or CAD respectively. 

There will be additional hurdles for investors acquiring US and Canadian equities with a local currency based out of Asia and EMEA – specifically around bank holidays in their local base currencies.

Custodian and CLS cut-off times

From when US equity markets close (10pm CET / 4pm ET), there is just one hour to trade Foreign Exchange (FX), and, subsequently, one hour to submit those FX trade details for Continuous Linked Settlement (CLS) processing (midnight CET / 6pm ET) – the most efficient method for settlement.

Although there are talks for CLS to extend their cut-off time by 90 minutes, this extension will not help the underlying issue: the custodial cut-off times. 

To make matters worse, when there are local holidays (non-US/Canada), the T+1 trades will shift to T+0 settlement, and the purchasing of shares will require funds prior to the equity market close. 

Liquidity – “witching hour”

With this imminent change, market participants are anticipating a shift in liquidity where there will be an uptick after 11pm CET / 5pm ET (the current “witching hour”). 

Upon speaking to some major banks’ FX desks, we know there are talks for staffing to be extended on sales and trading desks to accommodate this witching hour. This will give market participants the ability to trade for a little longer, offering them a chance at settling in CLS and meeting their custodian cut-off time. 

What you can do

Communication

• Make sure all stakeholders (Clients, Portfolio Managers, Operations) are aware of T+1 changes, and staffing is extended accordingly. Your trades need to be submitted prior to the CLS cut-off so settlement instructions for FX can be sent prior to the custodian’s cut-off time.
• Ensure brokers are promptly matching your trades. This is especially important around holidays when trades need to be matched as soon as the security purchases are completed (and not postponed until after market closure) to give adequate time to meet the FX settlement cut-off.

Negotiation

• Speak to your custodian banks to extend cut-off times. Despite CLS’s efforts to potentially extend their cut-off time from the midnight CET by an additional ~90 minutes. If the custodian banks’ cut-off time is prior to that, the extended time is inconsequential.
• Speak to your equity broker; they may be able to give you ad hoc extensions in your equity trades from T+1 to T+2 around local holidays.

Technology upgrade

• Develop a robust system that works around the clock. This is particularly necessary if you are an asset manager that does not have a presence in the US and does not have coverage for late US/early Asia hours.
• Ensure a straight-through processing set-up so all trades are matched and sent out for FX execution and settlement without human intervention.

Estimate pre-funding

• Pre-funding is not a popular solution; however, some clients are placing FX instructions prior to their equity trades being complete with an estimated amount to reduce potential overdraft (OD) charges – should there be any.

Investment strategy shift

• Some clients are looking to change their investment currency from their local currency to USD. This approach is not for all but is a consideration by a few investment managers.

For Professional Clients Only.

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