FX Ecosystem 06 Part 2 | T+1, the FX ecosystem and CLS: What difference has a day made so far?| ShapingFX series
The global financial landscape underwent significant transformation in May 2024 as the settlement cycle in the US and Canadian securities markets shortened from T+2 to T+1. CLS carried out extensive analysis and engagement prior to the transition and has been monitoring events since.
History and background
In May 2024, the US and Canadian securities markets transitioned to a T+1 settlement cycle. This latest round of settlement cycle shortening signifies a major shift in the financial landscape. The move towards T+1 settlement cycles is gaining momentum worldwide, and other jurisdictions are planning to shorten their settlement cycles over the coming years.
The impact of T+1 on FX cut-off times
The contraction in settlement cycles in the US and Canadian securities markets impacts financial markets worldwide, given that almost 20% of securities and 17% of equities are held outside the US.1
Time zone differences mean European and Asian investors and asset managers have much less time to
mobilize currency to fund a US or Canadian securities trade if it settles on a T+1 basis. This is because US and Canadian securities trades are typically executed towards the end of the business day in Asia and Europe. Some feared that requiring these securities to settle the following day could force investors to execute and settle a foreign exchange (FX) trade on a same-day (T+0) basis. In other words, there was concern that the shift to T+1 for securities settlement could require shifting to T+0 for FX, at least for some parts of the FX market. As such, in a T+1 world, services such as CLSSettlement may not be usable for a small fraction of securities-related cross-border currency trades.2
1 Department of US Treasury, “Foreign Portfolio Holding of US Securities,” 30 June 2023.2 CLSSettlement offers FX settlement risk mitigation through payment-versus-payment (PvP) settlement and liquidity optimization through multilateral netting.
