US Stock Trading Puts FX-market Anchor on Edge

CLS, the world's largest foreign-exchange settlement firm, is grappling with the challenge of adapting the $7.5 trillion-a-day currency market to accommodate a significant shift in US stock trading. The United States is on the verge of implementing T+1, a move that will reduce the time required to complete equity transactions to just one day. However, this change will create a misalignment with the foreign exchange market, where trades typically take two days to settle.

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The impending shift poses a critical issue for overseas investors purchasing US assets, as they will need to secure dollars at a faster pace to complete transactions. This has led to concerns about a frantic rush and an increased risk of failed trades. CLS, responsible for settling over $6.5 trillion daily through its systems, has identified that approximately one-third of asset managers are not prepared for this transition. The firm estimates that around $65 billion worth of trades it processes could miss the cut-off time for next-day settlement.

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To address this challenge, one option being considered by CLS is to extend its settlement deadline to 6 p.m. in New York. This extension aims to provide investors with additional time and flexibility to secure the necessary funds. However, the potential extension poses its own set of challenges, particularly considering that liquidity is typically lower in the late US afternoon, known as the "witching hour."

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Currently, CLS is surveying its members and is expected to announce its decision regarding the deadline extension—whether it will be extended by 30, 60, or 90 minutes or remain unchanged—at the end of the quarter. Lisa Danino-Lewis, Chief Growth Officer at CLS, emphasized that, based on the responses received so far, a 90-minute extension seems unlikely as it may introduce risks into the system.

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Given the magnitude of the upcoming shift, CLS plays a crucial role in finding solutions. Bank of New York Mellon Corp. has described this impending change as the most transformative since the advent of electronic trading in the early 2000s. However, finding a comprehensive solution remains challenging, and CLS acknowledges that even if the deadline is extended, multiple factors need to align for it to be effective.

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Asset managers access CLS through its 74 members, including major banks such as Goldman Sachs Group Inc., JPMorgan Chase & Co., and Citigroup Inc. The readiness of all these members to accommodate the later deadline is a prerequisite, and some banks have indicated that it may take up to a year for them to be fully prepared.

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The potential delay in CLS's deadline, if decided upon, would not be implemented until 2024, leaving asset managers seeking alternative settlement options in the interim. This raises operational risks, as these trades could fall out of CLS, representing a potential setback for the market.

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As the clock ticks down, CLS settlement members are working diligently to prepare their systems and minimize potential impacts for asset manager clients during the transition. However, complexities arise as some settlement members have their own earlier cut-off times, which may not align with the extended deadline.

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The discussion around extending the deadline underscores the challenges and complexities involved in synchronizing disparate timelines within the financial ecosystem. The need for visibility and cooperation among custodian banks, settlement members, and asset managers becomes increasingly crucial to navigate this transformative change effectively.

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