38.5 per cent of FX trades from Europe will not meet the CLS cut-off time of 6pm EST under T+1, finds a recent survey published by the European Fund and Asset Management Association (EFAMA). This corresponds to putting approximately US$50 to US$70 billion at risk on “normal trading days” and double the sum at risk on “active trading days”.

“Putting US$50 to 70 billion or greater at risk, on a daily basis, in the world’s major currencies should be a significant concern. This is of systemic importance,” warns EFAMA.

Risky alternatives

It predicts that with CLS access “significantly reduced”, asset managers may be pushed into “costlier and riskier alternatives”, including prefunding, making “operationally complex” FX trades on trade day that require a “true-up” the next day, and bilateral settlement that bypasses CLS altogether.

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T+1 “does not represent an absolute reduction of risk in the system”, says EFAMA. Instead, it could mean “a shift away from credit and market risk to an increase in operational and settlement risk”.

The association urges regulators to consider extending the CLS cut-off time and the custodian community to adopt later cut-offs that are more aligned with CLS.