It was billed as being one of the most impacted market practices from the rollout of T+1 settlement for US equities, but over the first three weeks, the FX market is operating BAU, according to European experts from the worlds of custody and asset management.
Despite the relative ‘non-event’ however, there are two important factors to consider: firstly, that many asset managers are still taking a wait-and-see approach, and secondly, that we have yet to encounter the first US public holiday in a T+1 environment.
Participants were asked if any FX execution was occurring between the 4.00pm – 6.00pm ET window and there was a unanimous ‘no change’ from the speakers.
“We’re seeing the continued same averages that we were seeing previously,” said Michael Wynn, managing director, head of execution services, securities services at Citi. “The timing of the requirements from an FX perspective continue to remain as we saw in the past, so we’ve not seen any significant shift in terms of execution, timing, and certainly not later in the day as we first anticipated.”
Additionally, one major asset management outfit noted: “Speaking to peers, I think there’s still a wait-and-see approach. I’m in that 5.00pm-6.00pm ET as a house, but I’m hearing others are still just holding things back and may not have shifted.
“But if anyone’s thinking about pulling coverage on a Friday, I would advise not to. I don’t think there’s been much stress in the ecosystem, as in around holidays. I know we had Monday [10 June] being an Australia/ China holiday, and then we’ve got one next week with US, and obviously 4 July.”
With regards to upcoming holidays, many speakers believed this would be a big test, particularly when occurring on a Monday – the next of this kind being Labour Day on 2 September. Another asset manager said the approach is to “wait until these holidays occur and experience it and if there is a fallout, then we’d like to bring it back on the table”.
Citi’s Wynn noted that before T+1 came into force, some clients moved more into standing instructions, outsourcing their FX execution to the securities services provider from a simplification perspective and removing the funding challenge.
When asked whether this was a short-term solution, he replied: “The sense I get at the moment is that’s probably not the case. We’ll continue to speak to them and find the right FX solutions for them if they feel that’s not the ultimate outcome they want. Ultimately the conversations thus far feel more certain in terms of continuing that as opposed to it being a temporary measure.”
When CLS declared it would not be extending its cut-offs just a couple of months prior to the shortening of the settlement cycle, two things happened: firstly, there were concerns that trades might be settled bilaterally also increases the counterparty risk, and secondly, that the ball was firmly put in the court of the custodians to instead shift their cut-off times.
Regarding the bilateral settlement, some speakers referenced an external webinar where CLS had said there has so far been “some earlier submissions and some later submissions” but no evidence of a significant change in volumes. One asset manager’s response to this was to credit custodians for extending their cut-offs closer to that of the multi-currency settlement system.
Despite the praise, the speaker also said: “I think there’s more work to do among the custodian community where there’s still a few more outliers on the later stage that needs to be improved.
“I would hope… that there’s some standardisation in the custodian world on cut-off times [in the future].”
Much like feedback from the first week of the War Rooms, so far, no major changes have occurred, however this all appears to be the case of a hyper state of focus and support from the securities services community. Moving past the one-month mark and into a series of public holidays could drastically alter thing.
Earlier this week Global Custodian reported that, in the week that T+1 went live, Clearstream’s global balances saw an increase of 29% – a figure which Phil Brown, CEO of Clearstream Banking, attributed to clients pre-positioning their dollars in preparation for the switch.
“What the clients didn’t know was how the market was going to function,” he said. “Those levels haven’t reverted back to pre-T+1 levels, which means that foreign investors are now having to rebuy their cash in order to fund that settlement. That’s a cost that’s not visible to the market.
“Regarding the challenges around FX, the SEC has said very clearly in the past that they think foreign firms will change the way they operate in order to meet the requirements. I think we’ve seen it here, but we haven’t seen the cost of that change yet.”