THETRADETECHFX DAILY cover feature
T + 1 SETTLEMENT :
The biggest FX shake up in decades
The TRADE reported on 14 August that the testing period for the shift to T + 1 settlement in the US had officially begun . The critical window – set to run until the planned implementation date at the end of May 2024 – is a crucial opportunity for the industry to iron out any creases , of which there are many , before the transition is completed .
While at face value , shortened settlement cycles suggest greater efficiency and could minimise the risk of default as transactions are completed more quickly , the new requirements are likely set to force many institutions to undergo a major operational overhaul to ensure they adhere to them .
Many of the chief concerns revolve around FX trades which are typically executed after an equity trade has been matched and executed and subsequently will be under increased time pressure . If FX trades cannot be completed in the same time frame there is the potential that the market could start to see more settlement fails .
Speaking to The TRADE in August , James Kemp , managing director of GFMA ’ s Global Foreign Exchange Division , explained : “ When analysing the impacts of faster settlement , it is important to consider FX both as an asset class in its own right and
As the testing period for the US shift to T + 1 kicks off , ANNABEL SMITH explores what the foreign exchange-specific implications of the transition might be across achieving best execution , sourcing liquidity , flow netting and trade matching .
also in its role in cross border securities transactions and the corresponding FXfunding transactions and operational processes that need to be completed to support those transactions .”
For example , if trades head into the US close , non-US asset managers could be left with a tiny window to get an equity trade matched and FX trade generated and then executed into the market . With additional demand caused by time pressure , there is also the potential for traders to face wider spreads on larger size FX risk at the end of the day .
One such solution to said problem could be simultaneous execution of equity and currency trades but this leaves trading desks subject to increased risk of executing FX trades against unconfirmed or unmatched equity trades .
Some buy-side trading desks are so hyperaware of the regulatory changes that they ’ ve moved to set up new FX desks in the US to ensure no crucial execution flow slips through the cracks because of operational challenges .
In short , the shift is set to give foreign exchange one of the biggest makeovers it ’ s seen in decades as firms scramble to 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
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