VIDEO | The international nature of US securities trading means market participants cannot afford to ignore the currency exchange implications of faster settlement. Following his in-depth look at the issue in an article published earlier this year, contributor Paul Golden, along with three panellists, took to the stage at the PostTrade 360° Nordic 2024 conference to give the audience a live version of the discussion in the session titled “Faster settlement creates currency conundrum”.
The popular consensus seems to be that the US T+1 transition went smoothly. “Everything looks good on paper,” admitted Peter Herrlin, head of client solutions capital markets and banking EMEA at Northern Trust. But “it’s too early to tell”, he cautioned. “We need to see another cycle of rebalancing; we need to have more ugly long weekends in various jurisdictions to see where the pain points are.”
He has also observed that “extended settlement is perhaps more of a thing than people are advertising or being vocal about” – even though the US Securities and Exchange Commission (SEC) “was quite clear from the outset that the strategy was supposed to be an emergency measure, and not for managing liquidity”.
But liquidity is not the only issue. Tara Taylor, managing director at State Street Global Markets, believes that many challenges have to do with deadlines – from counterparties, for CLS settlement, and custodian trade and payment instructions.
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Data dependency
The solution, Taylor suggested, lies in data. It’s about how quickly clients can get the data needed to execute their FX. Failure to do so would push settlements to become same-day value or cash transactions – a trend that she has already observed. “As other markets move to T+1 or perhaps even T+0, analysing the data to be able to make adjustments in workflow is going to be very important.”
She recalled that in the run-up to T+1, many buy-side clients were “very focused on the equity piece”, even amid reminders from her team not to neglect FX. Post-T+1, these clients are now examining their FX workflows and realising that straight-through processing (STP) and automation – which depend on data – are key to doing things better and faster.
Katie Renouf, senior vice president of global investment management distribution at Mesirow, agreed. Addressing the panel, which was heavy on sell-side representatives, she said, “Our clients are trusting us to act on their behalf. An integral part of that is understanding how they operate – understanding data in, data out, and not just the trade itself.”
Not all about CLS
Perhaps one of the biggest controversies in the US T+1 transition occurred when CLS announced that it had no intention to delay the cut-off time for FX trades. According to the panel, that might have been a misstep for the firm.
Renouf conceded that “CLS has been viewed for such a long time as the gold standard for settlement”. However, one of her major buy-side clients has revealed in a conversation his opinion that “there is room in the market for a CLS competitor to come up the ranks”, especially as the industry stands poised on the advent of blockchain and artificial intelligence (AI). “They didn’t quite deliver what everybody needed for T+1, so it will be interesting to see if someone else does come forward.”
Different approaches
In handling T+1 transition, Nathan Vurgest, trading director at Record Currency Management believes that there is no one-size-fits-all solution. “it depends on how you are set up internally. Five different firms can come up with five different ways of solving the same problem.”
For Herrlin, it’s about starting in good time. “I think the ones who have done well are the ones who looked at it early, reviewed their entire business model and processes, and didn’t see it as a settlement issue. They saw it as an overarching business issue… Actually addressed it and not push it down the line.”
Panelists:
Katie Renouf, Senior Vice President, Global Investment Management Distribution, Mesirow
Nathan Vurgest, Trading Director, Record Currency Management
Peter Herrlin, Head of Client Solutions Capital Markets and Banking EMEA, Northern Trust
Tara Taylor, Managing Director, State Street Global Markets
Moderator:
Paul Golden, Principal, Paul Golden Writing Services
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