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Navigating the T+1 Transition: the FX impact on the asset management community
The transition to a T+1 settlement cycle in the US securities market, due for implementation in May 2024, signifies a major shift in the financial landscape. While it will benefit market participants by reducing credit, market and liquidity risks in securities transactions, it may create post-trade challenges for asset managers’ cross-border transactions, where the FX component of the transaction needs to be settled before the security.
In particular, the T+1 era will highlight the relationship between asset managers and custodians. CLS settles on average USD6.6 trillion per day for over 70 settlement members and 35,000 third-party participants. Of that average daily settlement value (ADV), approximately 20% is attributable to third-party participants that access the service through custodian banks.
For asset managers that access CLSSettlement indirectly, it is the custodian that handles all payment instructions and funding relating to its clients’ FX trades. Each custodian sets up a distinct ‘cut-off’ time by which it needs to receive all payment instructions related to its client asset managers’ FX transactions so that it can submit corresponding payment instructions by CLS’s 00:00 CET initial payment schedule (IPIS) deadline. Custodians are able to submit trade instructions after 00:00 CET, but they will not be included in the IPIS and will only be taken into account at 06:30 CET when CLS calculates and publishes the revised pay in schedule.
Impacted buy-side volumes
To better understand how the shift to T+1 may impact asset managers, especially those dealing with varied custodian cut-off times, CLS conducted a detailed analysis of its transaction data and engaged with the buy-side. The analysis showed that about 0.4-0.5% of the CLSSettlement ADV could move outside of CLS as a result of T+1. Most buy-side respondents believed that the majority of their existing CLS-eligible flow could still be settled through CLS, without any changes to custodian cut-offs or CLS deadlines. Additionally, while CLS will not change the 00:00 CET IPIS deadline, settlement members can still submit their instructions up to 06:30 CET for settlement that day, providing some flexibility in handling transactions within the same settlement day.
Regulatory and ecosystem challenges
Any material changes affecting the risk posed by CLS could require regulatory engagement. Changes to CLSSettlement would also require a comprehensive risk assessment supported by detailed modelling and analysis, and would necessitate changes to systems and processes throughout the ecosystem. According to a survey of CLS’s settlement members to assess the feasibility of extending the 00:00 CET IPIS deadline, over 40% of CLS settlement members reported that system development may be necessary to accommodate a move in CLS’s IPIS deadline, with considerable time to implement.
As a result, CLS has concluded that it will not make any operational changes to CLSSettlement ahead of the T+1 implementation date of 28 May 2024.
CLS support
In the meantime, execution and operational efficiency across the asset manager and fund community will be paramount, and CLS offers several additional products in support.
For instructions that are not submitted to CLS, CLSNet, an automated and standardized bilateral netting calculation service, can help to reduce funding requirements and the number of payments required by calculating net payment obligations that facilitate payment netting. CLSNet also enhances operational efficiencies through full automation, removing manual interventions from the netting calculation process.
CLSTradeMonitor is another crucial tool for asset managers. It offers near real-time visibility of all CLSSettlement payment instructions, enabling asset managers to swiftly identify and resolve any exceptions to enable timely settlement, an increasingly vital capability in the T+1 context.
After T+1 implementation in the US securities market, CLS will continue to monitor the impact of T+1 on the asset management community and explore any challenges from the shorter settlement cycle. In the meantime, in the final lead-up to T+1 implementation, CLS will continue to support its asset management community and liaise with the relevant industry bodies to facilitate a smooth transition to T+1.
First published in Global Custodian, May 2024.