What T+1 risk? Dealers shake off FX concerns

For
over
a
year,
trade
associations
and
industry
working
groups
have
been
warning
that
the
transition
to
a
T+1
settlement
cycle
for

US,
Canadian
and
Mexican
securities
would
be
one
of
the
biggest
structural
changes
to
hit
the
foreign
exchange
market
in
years.

There
were
even
doomsday predictions
that
40%
of
daily
flows
from
European
asset
managers
–
worth
between
$50
billion–70
billion
–
could
be
forced
to
settle
bilaterally
outside
of
the

CLS
platform,
leaving
them
without
the
protection
provided
by
payment-versus-payment
(PvP)
settlement.

Well,
the
May
28
deadline
came
and
went,
and
to
many

FX
participants
the
transition
was
one
of
the
biggest
non-events
in
recent
times.

Dealers
and
custody
banks
say
the
supposed
bilateral
settlement
risk,
increased
operational
strain,
stress
in
the
overnight
swaps
market,
illiquidity
and
wider
spreads
from
trading
later
in
the
New
York
day
–
all
resulting
from
the shortened
timeframe
in
which
to
transact
the

FX-related
trades
–
have
yet
to
occur.

The
industry
also
seemed
to
have
passed
the
test
three
days
later
when

MSCI
rebalanced
its
family
of
indexes,
a
quarter-end
event
that
affects
thousands
of
mutual
funds,
portfolios
and
exchange-traded
funds
and
which
normally
sees
billions
of
dollars
of
stocks
traded
and
any
associated

FX
hedges
adjusted.

One

FX
dealer
recalls
sitting
at
their
desk
at
5pm
on
the
day
of
the
rebalancing
all
set
for
the
phone
to
ring.
It
didn’t.

There
was
also
a
public
holiday
in
Australia
on
Monday,
June
10.
This
sparked
fears
that
if
an
Australian
fund
executed
a
US
securities
trade
on
the
preceding
Friday
evening,
the
FX
component
wouldn’t
be
exchanged
because
the
country’s
central
bank
would
be
closed
and
the
currency
transaction
could
not
be
settled.
That
would
have
resulted
in
the
underlying
equity
securities
trade
falling
through.
But
dealers
reported
no
major
issues
there,
either.

Some
custodians
opted
to
move
their
cut-off
times
to
give
clients
more
time
to
meet
CLS’s
multilateral
settlement
deadline.
This
meant
fewer
securities
trade
fails,
as
reported
by
the
Depository
Trust
&
Clearing
Corporation
where
total
affirmation
rates
had
actually
increased
to
94.89%
as
of
June
7.

What
does
all
of
this
suggest?
You
could
argue
the
trade
bodies
and
working
groups
successfully
did
their
job
by
making
market
participants
aware
of
the
changes
to
their
workflows
and
operations
that
the
transition
would
require.
And
that
asset
managers
made
all
the
necessary
preparations
of
moving
staff
to
the
US
east
coast
to
handle
the
FX
trades
during
the
appropriate
hours,
or
outsourced
a
lot
of
the
trading
to
custodians.

But
could
it
be
that
this
is
just
the
calm
before
the
storm?
The
feeling
is
that
many
firms
had
put
in
place
contingency
measures
to
handle
the
immediate
switch
to
T+1.
But
when
the
market
returns
to
business-as-usual
activities
and
volatility
resurfaces,
then
more
obvious
challenges
could
arise.

One
potential
concern
cited
by
dealers
is
the
impact
on
liquidity
if
clients
start
to
demand
pricing
later
in
the
trading
day,
especially
if
flows
are
one-way.
Banks
will
then
have
to
rely
on
counterparties
based
in
Tokyo
to
come
online
to
offset
these
trades.
Otherwise,
spreads
could
begin
to
widen
significantly.

So
for
now,
the
industry
could
be
forgiven
for
popping
a
cork
in
celebration
of
a
rare
success
story
in
the
history
of
market
structure
shake-ups.
But
let’s
give
it
a
month… 

Editing
by
Lukas
Becker