Ahead of the implementation of the US’s settlement cycle for broker-dealer securities trades to 1 business day after the trade date from May 28, 2024, the European Fund and Asset Management Association (Efama) has urged central banks and regulators to assess foreign exchange settlement risks.
On February 15, 2023, the Securities and Exchange Commission announced that the deadline to shorten the US settlement cycle from two business days after the trade date (T+2) to one (T+1) will take place on 28 May 2024.
Steps fund houses can take to prepare for US T+1
A recent survey on European fund managers by Efama – the voice of the European investment management industry – found that 40% of daily foreign exchange flows will no longer be able to settle through the continuous linked settlement platform.
According to Efama, on a regular trading day, this could amount to US$50-70 billion, whereas in volatile markets this figure could be in the hundreds of billions. “Increased foreign exchange settlement risk carries systemic implications as previous episodes in history have shown,” it added.
FX Trading: How exposed are you to T+1 settlement?
In a statement issued today, Efama has urged central banks and regulators to take a more proactive role in adopting mitigating measures such as an extension of the continuous linked settlement cut-off time and improved cut-offs and alignment among the custodial community.
“This urgency is compounded by the fact that within days of the US go-live, major indices like MSCI World are set to rebalance (31 May 2024),” it stated.
According to Vikas Srivastava, chief revenue officer at tech firm Integral, ensuring tighter integration between equity and FX trading systems will be key. While the burden largely falls on asset managers, banks can assist by integrating their services into buy-side clients’ systems through APIs.
Srivastava added: “Automated workflows can seamlessly connect the buy side FX execution management systems to the liquidity providers, shortening the time to execute the FX trade required to source dollars to settle the equity trades.”
The “winners” will be those who implement cloud-based technology acting as a bridge between buy and sell-side firms to coordinate in the shorter timeframes, he highlighted.
