CLS Rules Out Operational Changes to Meet T+1 Switch
Posted by Colin Lambert. Last updated: April 10, 2024
With The Full FX View
CLS has formally ruled out making any changes to its main settlement service ahead of the North America switch to T+1 settlement in its securities markets at the end of May, preferring instead to push its bilateral CLS Net solution.
The utility says that while it will not move the 00.00 CET deadline for the initial pay-in schedule (IPIS) calculation, settlement members can still submit their trades to CLS Settlement up to 06:30 CET for settlement that day.
The decision had been widely expected, CLS itself has highlighted the challenges involved in making a change in such a quick space of time, however it will come as a disappointment in some quarters, not least the European Fund and Asset Managers Association (EFAMA), which recently advocated that European and US authorities should force through a change.
CLS points out that as well as being subject to any required approvals, any changes to the existing CLS Settlement service would require a “comprehensive risk assessment supported by detailed modelling and analysis and, crucially, require the whole ecosystem to make changes to their systems and processes”.
The Full FX View
The headline here will be seen by many as CLS not riding to the rescue of the asset management industry in particular, but that would be a wrong interpretation of the problem. CLS was, is, only ever going to be a part of the solution, and was never going to be able to react in time for the T+1 changeover in North America given the regulatory and governance hoops it has to jump through.
To me, the headline here is how the industry seems divided on the issue. EFAMA, the European Fund and Asset Managers Association, has advocated a change in CLS to help its members – a call that has, rightly, given the time horizon involved, been rejected. It is notable, however, that CLS justifies its decision by pointing out that a (very substantial) minority of settlement members “may” find it necessary to adjust systems and processes.
This is the cautious, glass-half-empty, view of the issue, which is common among those running critical market infrastructure, and CLS and those 40% of settlement members should not be criticised for holding this opinion. At the end of the day, no matter how much value we think is at risk of settling outside CLS, the service still has as its priority the trillions of dollars it settles as a matter of course each and every day.
Ultimately, CLS’ decision looks after the majority, not the minority, and, significantly, it does not rule out changes at a later date (they are still unlikely, however, in my opinion). There are questions as to whether even a 90-minute extension to the cut-off time would help those asset managers who are not prepared, meet the deadline. Given this is a (lack of) technology issue at unprepared firms, it is unlikely.
Custodians can help by extending and aligning, where necessary, their own cut-off times, several of which are not close enough to CLS’, but the reality is the asset managers have to help themselves. This changeover has been known for some time, so it is fair to ask ‘why aren’t firms ready?’ It could be they are in the process of revamping their platforms and have run out of time – and that is fair enough. Too many, however, have stuck their head in the sand in the belief that yet again, the service providers will come to their rescue.
The bottom line is that a substantial amount of asset manager flow from around the world will not be able, in the words of EFAMA, “to settle safely and efficiently”. This is regrettable, and it also represents a blow to the authorities’ efforts aimed at increasing the use of PvP settlement mechanisms in FX markets.
The fault, however, once this decision percolates the industry, should not be seen as laying with CLS – it is with those firms that chose to ignore what was happening. These firms can, hopefully, still use CLS in a T+1 environment, but they will either be settling bilaterally, or they will be abandoning their best execution policy and trading through one counterparty – their custodian. That is no-one’s fault but their own.
CLS conducted a survey of its settlement members to assess the feasibility of extending the deadline, and says this showed that over 40% of settlement members, representing approximately 50% of CLS Settlement’s average daily value (ADV), reported that system development may be necessary to accommodate a move in CLS’s initial pay-in schedule, with considerable time to implement.
It adds that an analysis of transaction data to assess how the move to T+1 could affect asset managers and funds indicated that the overall impact to CLS Settlement “may be limited”. A value equivalent to approximately 1% of the CLS Settlement ADV is executed on a T+1 basis, comprising volumes where one side is USD and a fund is party to the trade, the service says. CLS adds that asset manager outreach indicated that 40-50% of the 1% of CLS Settlement ADV could be impacted by the move to T+1 and could settle outside of CLS.
More than 50% of asset manager respondents said the majority of their risk can still be mitigated through CLS even without any changes to custodian cut-offs or CLS deadlines, while 35% have not yet decided how to respond to the impact of T+1.
CLS says it will monitor the impact of the transition to T+1 post-implementation in May 2024, and will update stakeholders at the end of June and September. “We will continue to work closely with our settlement members, asset managers and the wider ecosystem to explore possible solutions to address any challenges that may arise from the transition to T+1, while ensuring that the stability of the FX ecosystem remains our top priority,” it states.
“In the meantime, execution and operational efficiency across the asset manager and fund community will remain paramount. For same-day instructions that cannot settle within CLS due to custodian cut-off times CLS Net, CLS’s automated and standardised bilateral netting calculation service, can help to reduce funding obligations and the number of payments required by calculating net payment obligations that facilitate payment netting.”
