redesign their workflows to meet the new requirements . Future FX transaction functions are set to be markedly different , exacerbated by the need to settle closer to execution .
Liquidity patterns Among the most central challenges for the foreign exchange market caused by the shift to T + 1 is its impact on liquidity and the potential for a shortened settlement window to make the market less attractive to source FX . Thanks to the UK / EU and US time difference , the shortened settlement timeframe has been flagged by traders as likely to create a “ golden hour ” of liquidity at 5 pm Eastern Time – otherwise known as midnight in the UK . The result of this , if no other solution emerges , means that for many the prospect of moving FX desks to the US will become a reality . “ Is there good ( any ?) liquidity in the FX markets late in the day NY time ? I usually do my FX after the trade has been confirmed and matched ,” said one individual responding to a T + 1 Industry Issues Forum hosted by The TRADE ’ s sister publication Global Custodian . Trading patterns are undoubtedly set to change as many trades will now be forced to trade outside of CLS leading to potentially increased settlement risk . Institutions will also need to have dollars available to settle US securities . “ The biggest issue is around the cash management side of things . Should we trade FX after US close ? Will this be a liquidity point ? Currently there is no liquidity in the US session . Can CLS extend cut offs ?” asked one anonymous responder to Global Custodian ’ s T + 1 forum . “ Will they be able to handle T + 0 in CLS ? Will FX markets also change to T + 1 e . g ., EUR-USD and USD-DKK ? We also have some system limitations on how fast trades can be booked as they go through post-trade compliance . On large volume days it can take an hour to book trades after US close .” With fewer breaks in a shortened settlement window , custodians may also be forced to opt for alternative automated payment vs payment ( PvP ) FX settlement methods in their post-trade processes . “ If the CLS cut off is around 11 pm CET on VD-1 , how are we meant to keep
netting our FX ? Does this just mean that we ’ re going to have to do everything on a gross basis ?” asked another respondent to the T + 1 forum . Traders have flagged that the new timelines provided by custodian banks to ensure FX trades are settled on a PvP / net basis under T + 1 are restrictive , and if missed could go some way to reversing the work done in the FX industry to reduce settlement risk by forcing volumes to be settled bilaterally ( see page 24 for an in-depth look at T + 1 with Baillie Gifford ’ s Catriona Lawlor ). The operational changes also pose a challenge to counterparty selection . The new requirements could mean that operational considerations and cut of times will have to be taken into account by the buy-side when selecting a counterparty and this has the potential to hinder best execution .
28 Global Custodian Sibos Special 2023