CLS Sees No T+1 Impact on FX Markets
Posted by Colin Lambert. Last updated: July 10, 2024
With The Full FX View
CLS has provided an update on activity across its core CLS Settlement service just over a month after North American markets moved securities settlement to T+1, confirming that there has been no decrease in either daily settlement values or volumes.
The settlement service says it has seen a slight uptick in fund-related submission values to CLS Settlement starting from 14:00 CET onwards, with a more pronounced increase between 22:00 and 23:00 CET. This is followed by a decrease after 23:00 CET. CLS observes the initial increase is more significant than the subsequent decline, suggesting no overall loss in submission values. “While we cannot definitively attribute the observed growth to the transition to T+1, there are early signs suggesting that the shortened settlement cycle is influencing behaviour within the asset manager and fund communities during this time period,” CLS says in its statement.
It adds that the increase observed from 14:00 CET could indicate an increase in funds executing the FX component of a security before confirmation of the security trade execution. Equally it says the increase between 22:00 and 23:00 CET may suggest that funds are still able to submit their securities-related payment instructions to CLS Settlement, possibly due to enhanced process automation and support from global custodians in adjusting cut-off times ahead of the CLS 00:00 CET initial pay-in schedule (IPIS) deadline.
“CLS will continue to monitor and analyse its transaction data and will provide further updates as appropriate,” it concludes. “In the meantime, prioritising execution and operational efficiency across the asset manager and fund communities remains paramount. CLS will continue to work closely with its 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.”
The Full FX View
The update from CLS confirms two things, firstly, that the transition has to T+1, from an FX perspective, has been successful. This is probably due to a combination of factors, not least custodians extending their windows closer to the CLS cut-off, and funds using their custodians more generally for the FX requirements.
It is notable that CLS talks of funds possibly executing their FX trade ahead of the securities confirmation, one behavioural change The Full FX has anecdotally heard about is an increase in what could be termed “guess-hedging”, where the manager has a good idea what their requirements will be and executes accordingly, with a smaller, adjustment, trade later on.
It should be noted that, as noted by CLS in its statement, the data is affected by more than just fund FX trading volumes. June was a busy month in FX markets generally, with multiple events, so it is probably best to await final average daily volume data from CLS later this month. The service says it has handled record monthly volume at $7.8 trillion, but multiple platforms have also reported ADV at, or close to, record highs, and as such a better indication will be provided. In spot terms, while we await the LSEG FX data, which comes later in the month, most platforms have reported double-digit gains in spot, both in monthly and annual terms. Something similar should be expected from CLS.
The second aspect of the T+1 changeover that has been confirmed is that CLS was right not to change its window. The market has adjusted to the new reality, meaning CLS has not had to go through the significant upheaval of changing its service, with all the regulatory and technical work that involves.
That is not to say it may not have to change in the future – demand for quicker settlement times will likely grow in the years ahead – rather that at this stage, it doesn’t look like it has to.
With CLS providing evidence that the change to T+1 has been smooth, only one potential outcome of the switch remains unknown – best execution. Anecdotally, some funds have had to adjust how they execute, with more emphasis on the custodian, but the majority seem to have either prepared well, or lucked in!
