While T+1 is well on the way to becoming reality in the US, the jury is still out on how the FX market would react. Amid the scramble to adapt, only one player remains resolutely unchanging: Continuous Linked Settlement (CLS). Eva Szalay outlines on The Banker the challenges facing a sector that’s trying to work around CLS’ stance and speculates whether FX trading will shift into an operations pattern more similar to equities.

According to a spokesperson for CLS quoted in the article, “no operational changes are planned for CLS settlement”. The company claims that it already supports T+1 trade flows, provided that “payment instructions related to an FX transaction are submitted to CLS by 00:00 CET on the day before the value date”. It estimates that “less than one percent of the CLS settlement average daily value could be affected by the change”.

Other market participants do not seem to share CLS’ composure. Inés de Trémiolles, head of trading at BNP Paribas Asset Management believes that the lack of accommodation on CLS’ end could force those on the FX side to cut away from the firm. “Overall, this will mean increased transaction costs.”


A matter of time

The article points out that because most trades in US equity trading are executed just before the New York Stock Exchange (NYSE) closes at 16:00 Eastern Time, which is 22:00 Central European Time (CET), there are just two hours for investors to hedge their trades and send them to CLS before its midnight deadline. The actual time available is even shorter, because investors will have to meet earlier deadlines set by their custodians for settlement.

“For FX hedges related to the US equity flows, it looks like we will only have one hour to trade,” says Inés de Trémiolles.

Inevitable shifts

To work around these issues, trade participants could consider two strategies: establish a trading desk in the US, or hand over the whole process to custodians. According to the article, the first option may not be feasible for smaller and regional banks. The second isn’t usually the strategy preferred by larger asset managers.

The article concludes with a prediction from Xavier Porterfield, head of research at FX data firm New Change FX, who says that global FX liquidity patterns may shift. Instead of surging when the US markets open, liquidity may surge at the close instead, mirroring the pattern in equities.