In a recent announcement, CLS Group, the principal system for settling currency transactions, declared its decision to maintain its existing deadline for foreign exchange (FX) trade payment instructions. This decision comes as a setback for international asset managers who were seeking relief in light of a forthcoming U.S. regulation that threatens the success of their transactions.
Effective from May 28, the U.S. Securities and Exchange Commission (SEC) will mandate that investors complete the settlement of U.S. equity trades within one day post-transaction, known as T+1, a shift from the current two-day period. This change is aimed at minimizing market risk, a priority heightened by the GameStop trading event, and will reduce the timeframe foreign managers have to arrange U.S. dollars for purchasing securities.
Lisa Danino-Lewis, CLS's Chief Growth Officer, stated that the organization would not adjust its operational schedule due to the inability of some members to support such a change. With over 40% of CLS's settlement members indicating the need for up to a year to implement the required technological and operational adjustments, CLS finds itself unable to postpone its current deadline, which is set at midnight CET (2200 GMT, May 27) for submitting FX trade instructions for next-day settlement. Any alteration to this deadline would also necessitate regulatory modifications and a more thorough risk evaluation, according to CLS.
CLS has committed to continue monitoring the market following the U.S.'s transition to a shorter settlement cycle in May and is willing to revisit the issue if unforeseen circumstances arise. Updates from CLS are expected in June and September. Members unable to adapt to this change account for about 50% of the $6.5 trillion in average daily value (ADV) of transactions settled by CLS.
A survey among European firms revealed that due to the T+1 settlement requirement, approximately 40% of asset managers' daily currency trades, equating to $50 billion to $70 billion, would need to settle outside CLS's secure environment. This amount could escalate to hundreds of billions in turbulent markets.
Upon request from managers, CLS began exploring last summer whether its CLSSettlement service could accommodate later submissions for next-day FX settlement without destabilizing the markets. Surveys indicate that over half of the asset managers engaged with CLS believe they can manage the majority of their risk through CLS without any modifications, while around 35% are still determining their response to the T+1 transition.
