T+1 War Rooms – Asia: Firms adapt to FX challenges and operational shift 

The biggest challenge for participants in APAC regarding T+1 in the US revolves around FX execution and navigating the associated funding gaps, but despite that, experts in Asia from the realms of custody and asset management report that the market has adjusted well to the change through to preparation and automation. 


By Sophia Thomson

During the second week of the implementation of T+1 in the US, notable shifts have emerged for market participants in the Asia Pacific region. Some report an uptick in fail rates, pointing to operational strains, meanwhile, affirmations – crucial for transaction validation – also face hurdles, underscoring ongoing adjustments in operational procedures.   

But the big talking point for Asia Pacific was always going to be FX and pre-funding. 

Speaking on the Asia Pacific T+1 War Rooms roundtable discussion, market experts highlighted how expected challenges, such as reduced market liquidity during T+1 evenings, have been mitigated by earlier FX allocations, easing concerns to some extent. Other anticipated challenges have not materialised as significantly as feared, or perhaps it’s too soon to tell. 

Regarding pre-funding, Phillip Van Dine, APAC head of banks & market infrastructure at Citi highlighted that most clients are now utilising automated FX capabilities. These solutions typically leverage existing loan balances or intraday credit, facilitating the injection of various currencies beyond just US dollars. According to Van Dine, this process has been operating smoothly without significant issues. 

“We anticipated greater adoption of these automated layers. A primary industry concern was whether third-party FX counterparties could deliver funds punctually to client accounts. However, based on our observations, we haven’t detected an uptick in fail rates or delays in settlements,” Van Dine affirmed. “In Asia, a growing number of clients are embracing these automated solutions or accessing intraday credit, enabling us to efficiently manage settlements where US dollars are sourced from their FX counterparties.” 

Traditional windows 

From another perspective, a custody product manager weighed in on the term ‘pre-funding’: “From our institutional custodial viewpoint, the interpretation of ‘pre-funding’ can vary widely. Clients typically maintain non-zero cash balances, often holding long positions in US dollars or other currencies like Aussie dollars and Japanese yen. This allows them to leverage custodial FX capabilities or intraday credit for seamless dollar transactions throughout the trading day.” 

The manager noted no significant issues or concerns regarding the funding of trade settlements or the receipt of FX legs. However, granular data to pinpoint specific changes in these practices still remain limited. 

Another expert emphasised that many clients are now aligning their FX bookings with traditional windows used prior to T+1, thanks to early completion of allocation tools within the new framework. 

“I wouldn’t say there’s anything materially different,” they noted, echoing insights shared earlier by another custodian regarding FX strategies. “Clients are actively managing their FX positions, seeking operational effectiveness while maintaining an agile approach. This varies widely from larger institutions to smaller firms, each tailoring their approach to fit their specific needs.” 

Van Dine underscored the importance of understanding discrepancies between spot FX and same-day FX, emphasising the need for comprehensive data analysis. “This has been a crucial area of discussion pre-implementation,” he stated. “Quantifying these differences in spreads and their impact on funding costs is essential for markets transitioning to T+1. Obtaining and analysing such data will provide critical insights into liquidity and spread issues, facilitating informed evaluations of potential challenges.”  

Volatility will provide the big test 

Another expert highlighted that there’s a notion of ‘peacetime’ and ‘wartime,’ noting how certain challenges may only become apparent during periods of volatility, making it difficult to predict ahead of time. However, identifying these aspects could potentially provide firms with more confidence in further transitioning. If they can affirm that they didn’t notice any material deviations during a relatively calm market, it could offer additional reassurance.  

To manage this, Van Dine observed that Asian clients typically have their funds prepared for FX conversions and onward settlements. While lacking direct investor contact, internal discussions indicate no reports of investors requiring additional credit or support due to funding challenges. Clients appear to manage their trading strategies effectively, potentially adjusting positions in other markets to fund their accounts, though specific actions aren’t fully visible. 

He said: “By the morning in Asia time, clients know their obligations for affirmation and settlement instructions. This means they have all day to ensure their accounts have sufficient cash for both the FX settlement and the ultimate settlement that starts happening in our evening.” 

The custody product manager weighed in, saying: “From a custodial perspective, any potential concerns typically revolve around significant client rebalancing, particularly across the markets with longer settlement cycles. Aside from occasional delays in US buy orders, we haven’t observed transparency in underlying client activities as a custodian. 

“We’ve heard brokers extending credit, which has been a useful solution. There’s increased emphasis on active cash management, especially for Japanese clients navigating unique trust bank structures. Overall, there’s heightened awareness and involvement in cash management processes, varying with firm size and capabilities,” said another. 

Managed ahead of time 

One expert said: “Looking after the markets business in Asia, I would say FX is generally managed ahead of time, with Japan being a slight exception due to its unique market structure. Most of our clients’ trade in advance unless they have trading capabilities in the US time zone, allowing them to trade same-day FX. For those without such capabilities, pre-funding is the norm. 

They added: “We also hear from clients that some brokers allow T+2 settlement, effectively providing credit. In Japan, the unique structure of Japanese trust banks does not allow any window for same-day trades unless there is trading capability in the US time zone, so pre-funding is standard here as well. We haven’t seen anything extraordinary or different; most managers are well-prepared.” 

One custodian noted that in the mid-to-long term, they’ve noticed a few managers requesting automated FX solutions more frequently than before. Regarding affirmations, it’s worth mentioning that in Japan, affirmations are not used at all at this stage, which is unique to the Japanese market. 

A new BAU process? 

Following a period of war rooms, command centres and hyper care focus, Citi’s Van Dine described the evolution towards the firm’s new business as usual (BAU) standard: “With the new BAU, we’ve added some additional resources to manage queries and pay particular attention to specific timeframes, whether in Asia or Europe. This setup will likely remain until we’re confident that the entire market has normalised to this new process.” 

The custodian noted that it hasn’t seen any increased concerns, with query levels remaining steady. Things are operating as expected now, with query levels consistent with what they saw before. 

Van Dine added: “Regarding the time needed to respond to all queries, we’re still seeing a normalisation, particularly with trade status updates. We’re ensuring that clients receive instructions and are highlighting self-service options. We did see a spike in queries during the first week, but it has since normalised to expected levels.” 

Another firm mentioned that they placed significant focus on preparations leading up to the implementation date, and well into the second week, they’ve continued to allocate additional resources to handle inquiries and monitor ongoing developments, data, and statistics in the space. However, they haven’t seen any substantial fallout on their end yet. 

They said: “I think settlement inquiries should be more specific, client-based upon affirmations and why something may not be affirmed when they think it should be. We’re mainly focusing on that. General inquiries are still quite low for us.”