GFXC Urges Early Preparation for European T+1 Switch

In a new paper published by its Settlement Working Group, the Global Foreign Exchange Committee highlights the need for FX market participants to begin their preparations “as early as possible” for the UK and European switch to T+1 settlement, due in October 2027.

Whilst noting that the North American switch to T+1 in 2024 was “broadly smooth and operationally uneventful from an FX perspective”, the GFXC observes that the more complex and fragmented landscape in Europe may add to the same challenges for market participants. That said, the paper does suggest that only limited FX trades are estimated to be impacted by the transition.

“Preparation is key,” the paper notes. “FX market participants should understand what options for managing the transition are available to them and plan how they will engage with custodians and third-party providers, particularly around settlement-related cut-off times.

“It is also important that FX market participants take action to ensure they continue to reduce their settlement risk as much as practicable,” it continues. “The GFXC recommends all FX market participants trading FX to fund UK and European securities activities fully

understand the changes and begin their preparations as early as possible.”

The paper highlights the benefits of shorter settlement times, and also provides observations on the North American shift, most notably that some buy-side firms have opted to pre-fund their cross-border securities transactions on a T+1 basis which has led to only a modest increase in T+0 FX settlement.

From a sell-side perspective, the paper says although the FX market has not universally adopted a shorter settlement cycle, there has been some growing demand for same-day execution in certain US dollar pairs. Furthermore, some institutions have opted to move execution desks to different time zones to allow trading through more hours to help ensure they can meet T+1 settlement cut-off times.

Looking at the European switch, the paper highlights a couple of extra possible challenges, notably that Europe has multiple Central Counterparties (CCPs), Central Securities

Depositories (CSDs) and currencies, and this presents greater complexity. It also notes that Europe has 41 trading exchanges, 18 CCPs, 30 CSD’s and four currencies which currently settle outside of CLS Settlement. “Different rules across trading exchanges, such as varying cut-off times, may also hinder coordination,” the paper states. “Due to time zone differences, PvP provider and custodian cut-off times could be of particular consideration to Asian market participants. However, time zone challenges should be lesser for the UK and European transition compared to the North American move.”

The paper also suggests that “only a fraction” of FX trades are likely to be impacted by the T+1 transition. Ahead of the North American transition it was estimated that approximately 1%, or $70 billion of CLS Settlement’s daily settlement value (on a notional basis) could be impacted. Estimates suggest that the daily settlement values impacted in the UK and Europe are significantly less at $7 billion and $28 billion respectively.

The paper warns, however, that there could be a material impact on market participants who were not impacted by the North American transition and/or are unaware of the UK and European move. “This may mean they have not adjusted their business practices to prepare for shorter settlement windows leading to difficulty meeting new cutoff times,” the paper states.

Even Shorter Settlement?

The GFXC paper also takes a brief look at the possibility of even-shorter settlement cycles in the future, most notably as new technology starts to make its presence felt in the form of distributed ledger technology (DLT) and tokenisation.

Whilst noting that “in theory”, these technologies could further shorten the FX settlement cycle, the report warns that they are “still in the early stages and yet to be widely-adopted”. Furthermore, it states, “There are major legal, operational and regulatory challenges which would need to be overcome to enable the possibility of shorter FX settlement cycles in the future. For example, a move to a shorter FX settlement cycle would need to be adopted both globally and market-wide to be successful which would require strong international alignment.”

The paper also stresses that solutions would need to be interoperable, which again would

involve strong market alignment. “These major challenges, coupled with a lack of demand from market participants, make the shortening of FX cycles becoming market standard in the near future unlikely,” the report states. “Previous attempts of same-day settlement were discontinued due to high cost and low volumes.”