CLS, the globe’s largest foreign exchange settlement firm, is wrestling with adjusting the $7.5 trillion-a-day currency market to accommodate a notable shift in US stock trading.
The United States is nearing the implementation of T+1, which will diminish the time needed to finalize equity transactions to only one day. Nonetheless, this alteration will result in a discrepancy with the foreign exchange market, where transactions usually take two days to settle.
The imminent transition presents a pivotal challenge for foreign investors acquiring US assets, as they must acquire dollars more rapidly to finalize transactions.
This has sparked worries about a frantic scramble and heightened chances of trade failures. CLS, accountable for settling over $6.5 trillion daily via its platforms, has noted that roughly one-third of asset managers are unready for this shift.
The company approximates that approximately $65 billion worth of trades it handles could fail to meet the deadline for next-day settlement.
To tackle this challenge, CLS is contemplating extending its settlement deadline to 6 p.m. in New York.
This proposed extension seeks to grant investors extra time and flexibility to obtain the required funds. Nevertheless, the potential extension presents its array of challenges, particularly since liquidity tends to decrease during the late US afternoon, referred to as the “witching hour.”
Presently, CLS is conducting a survey among its members and is anticipated to disclose its decision regarding the deadline extension—whether it will be prolonged by 30, 60, or 90 minutes or remain unaltered—by the end of the quarter.
Lisa Danino-Lewis, Chief Growth Officer at CLS, underscored that judging by the responses received thus far, a 90-minute extension appears improbable as it could introduce risks into the system.
Given the enormity of the impending shift, CLS assumes a pivotal role in seeking solutions.
Bank of New York Mellon Corp. has characterized this forthcoming change as the most revolutionary since the emergence of electronic trading in the early 2000s.
Nonetheless, devising a comprehensive solution remains arduous, and CLS recognizes that even with a deadline extension, multiple factors must converge for it to prove effective.
Asset managers access CLS via its 74 members, which encompass major banks like Goldman Sachs Group Inc., JPMorgan Chase & Co., and Citigroup Inc.
The preparedness of all these members to adapt to the extended deadline is a prerequisite, and certain banks have suggested that it could take up to a year for them to be fully ready.
If CLS decides to delay its deadline, the implementation will not occur until 2024, prompting asset managers to explore alternative settlement avenues for the time being.
This heightens operational risks, as these trades might diverge from CLS, posing a potential setback for the market.
As the countdown continues, CLS settlement members are earnestly striving to ready their systems and mitigate potential impacts for asset manager clients during the transition.
Nevertheless, complexities emerge as certain settlement members maintain their own earlier cut-off times, which might not coincide with the extended deadline.
The discourse surrounding the extension of the deadline highlights the challenges and intricacies entailed in harmonizing disparate timelines within the financial ecosystem.
The imperative for transparency and collaboration among custodian banks, settlement members, and asset managers becomes progressively paramount to navigate this transformative change adeptly.
