THETRADETECHFX DAILY cover feature 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 .
One solution could be to outsource . Outsourcing operations for around the clock back and middle-office could be one such option but is a costly and arduous process to complete before May – especially for smaller firms . Alternatively , desks have the option to outsource FX all together .
In May , a paper released by the Global Foreign Exchange Division ( GFXD ) of the Global Financial Markets Association ( GFMA ) suggested the buy-side should adopt a strategic approach to managing FX risk in the lead up to the T + 1 shift , in particular highlighting outsourcing currency management – specifically “ to specialists who have trading / operations in the major trading time zones , alternate passive or active currency strategies , and 24-5 market access to wholesale FX pricing and liquidity management to assist with best execution .”
However , many traders in response to the T + 1 industry issues forum queried how they could be confident best execution rules were being met if they outsourced .
The changes , when implemented , are set to overhaul the way the FX markets currently operate . They will likely act as a catalyst for massive technological evolution as institutions look for solutions to the workflow challenges that arise . Initially it may only be the most automated corners of the FX market that are able to cope with the changes . Technology will be the deciding factor as to who thrives in this new post-trade landscape .
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