Today’s News
Image Source: Bloomberg
European asset managers are sounding the alarm about impending changes to trade settlement times on Wall Street, cautioning of potential systemic risks to currency markets. The European Fund and Asset Management Association (Efama) has highlighted that nearly 40% of daily foreign exchange transactions could face exclusion from the primary platform for reconciling currency trades once the U.S. transitions from a two-day to a one-day settlement period in May. This exclusion could escalate to “hundreds of billions” on volatile days, according to Efama.
Representing the vast European investment industry valued at EUR 28.5 trillion (USD 30.9 tn) , Efama has urged major central banks, co-owners of the CLS currency settlement service, to take urgent action to mitigate these risks. Efama emphasized the significance of safeguarding against the daily exposure of “USD 50bn to USD 70bn or greater” in major currencies, stressing the systemic importance of this issue.
The impending shift in settlement times by the U.S. and Canada for stocks, bonds, and exchange-traded funds (ETFs) has caught the attention of asset managers, particularly as European institutions held over USD 11 trillion of U.S. equities and debt last year. The move towards a T+1 settlement timeframe aims to reduce the capital tied up until trades are finalized, but it poses synchronization challenges across interlinked markets like foreign exchange, shares, and cross-border ETFs.
Custodians and asset managers, accustomed to having a full working day to address operational issues, now face a condensed timeframe of as little as two hours from late May. To adapt, many fund managers are establishing late-night teams in European or Asian time zones to finalize deals.
CLS, the primary platform for settling foreign exchange trades, operates within a time window synchronized with major central banks’ real-time gross settlement systems. While handling around USD 6.5 trillion in transactions daily, CLS facilitates the exchange of only about USD 65 billion, netting down outstanding payments. Should investors lose access to CLS, they would be required to secure additional cash to prevent trade failures.
Efama has advocated for extending CLS’s opening hours to provide overseas investors with more time to acquire necessary foreign currency for deal finalization. Phil Lloyd, head of non-bank financial institutions at NatWest Markets, warned of increased credit and operational risks associated with settling trades directly with buyers rather than through CLS.
Efama underscored the urgency of addressing these issues, particularly given MSCI’s plans to rebalance its widely tracked MSCI World index shortly after the U.S.’s shift to T+1.
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