UK Accelerated Settlement Group Throws Up Familiar FX Challenges

The technical group of the UK’s Accelerated Settlement Taskforce (AST) has published draft recommendations for a potential UK move to T+1 settlement in its securities markets, within which, familiar challenges for the FX market are laid out.

The AST has set the end of 2027 as the target date for the switchover, however if the European Union in particular, is preparing for a change close to that date, the report recommends coordinating moves between the jurisdictions. The underlying theme of the report is that firms will need, where necessary, to automate, “As firms in the US who have not automated seem now to be reasoning, the legacy of not automating is increased headcount costs to deal with manual processes and the higher levels of exception management that result from manual processing,” it states.

The report also envisions a post-trade Code of Conduct. Observing that the collective experience of group members suggests compliance with market practice “can in some cases be considered ‘optional’” the group says it believes that the final recommendations – to be published later this year – can serve as that Code of Conduct. “Compliance with the final recommendations should not be optional,” it warns.

On FX, the report follows a path familiar to those who engaged in the North American switch to T+1 at the end of May. It warns there may be increases in trading costs in illiquid periods (but adds, as the report was written soon after the US changeover, the scale of this will be more obvious after that event). It also observes that more trades may be settled outside of CLS, and therefore processes to minimise settlement risk for these trades, and that there may be changes in the identity of liquidity providers (but provides no further details on this).

Engagement with CLS and custodians is also recommended, the impact on other regions should also be monitored and assessed, it adds. Asia is expected to be impacted the most by the change – as it was the US switch – indeed the report observes that CLS data “currently suggests lower volumes of AsiaPac T1 volumes”.