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Revolutionizing the Market: The Impact of US Accelerated Settlement on Global Trading


Leo Gonzalez

March 15, 2024 - 02:53 am


Navigating the Tides of Finance: The Impact of a Faster US Settlement Cycle on Global Markets

In the bustling business hub of La Défense in Paris, France, amid the flurry of activity on the trading floor of the Euronext NV stock exchange, news emerged on Monday, January 15, 2024, that could reshape the financial landscape of the euro area. French Finance Minister Bruno Le Maire announced that the government was preparing to unveil a legislative package designed to attract more foreign financiers to the nation, positioning France as a pivotal player in the European economy. Amidst this development, a striking image captured by Bloomberg's Nathan Laine encapsulated the essence of this bold financial move.

A worker on the trading floor inside the Euronext NV stock exchange in La Defense business district of Paris, France.

A potent predicament is unfolding for European asset managers. They face formidable pressure as they sound the alarm over the potential upheaval of up to $70 billion in daily currency trading volumes. This trepidation comes as a response to the United States' ambitious stride towards a brisker securities settlement timeline, an initiative that could imperil the intricate dance of global currency transactions.

European Concerns Over US Market Changes

The seismic change in question is the US Securities and Exchange Commission, along with the Federal Reserve Bank of New York, proposing a move that will see the completion time for securities transactions cut by half—to just one day, commencing in May. European financiers are urging the world's predominant currency settlement entity, CLS Group, to prolong its current cut-off time for next-day settlements, to align with this expedited US schedule.

With the waveform of transactions altering to T+1, European investors who indulge in US market offerings find themselves in straits, compelled to procure dollars more swiftly to consummate their investments. For a market that conventionally operates on a two-day trade settlement cycle, this shift proposes a significant disruption.

The concern, as vocalized by the European Fund and Asset Management Association (EFAMA), is that today's push towards T+1 does not signify an outright risk reduction within financial systems. Instead, they argue, it represents a transference of risk—from credit and market variants towards operational and settlement dimensions. This shift, according to EFAMA, portends systemic implications.

The Dilemma of Asset Managers

Asset managers are positioned in a bind; with the countdown to T+1 ticking away, their investments in US stocks increasingly misalign with the foreign exchange world's tempo. This disconnect prompts a dire need for securing dollars in a much abbreviated timeframe to adhere to the deal completion requirements.

CLS at the Core

Indispensable to the architecture of the $7.5 trillion-a-day currency market, CLS upholds a pivotal role via its payment-versus-payment mechanism that assures concurrent compensation for both parties in a transaction. Presently, CLS is in the midst of consultations to possibly extend its deadline, with an announcement anticipated towards this quarter’s end.

Read more about the topic here: Faster US Stock Settlement Has Currency-Market Anchor Scrambling

Given the proposed changes, Lisa Danino-Lewis, Chief Growth Officer at CLS, has acknowledged the complexity of the situation, stating on a Thursday in response to queries from Bloomberg that any adjustments to CLS’s settlement services would necessitate regulatory interaction, in-depth risk assessments and analysis, and would require the entire spectrum of market participants to update their systems and processes. CLS’s commitment to engagement with its affiliates and the broader buy-side community, as well as its pursuit of feasible solutions, is unwavering.

EFAMA's Call to Action and Regulatory Response

EFAMA has released a stark warning, highlighting that the transition to T+1 could disqualify approximately 39% of its member's FX trades involving the US dollar from CLS settlement due to the existing timelines being unable to meet custodian deadlines which are pegged to CLS's cut-off period.

The trade association, which has under its umbrella firms managing assets totaling €28.5 trillion (equivalent to $31.1 trillion), is clamoring for a change. It calls for regulators to prod custodians into adopting more accommodating cut-off times closer to CLS's deadlines. As it stands, custodian deadlines are divided, some concluding at 6 p.m. Central European Time—a cut-off reflective of the European business day, while others extend to 10:30 p.m. CET.

In its advocacy, EFAMA firmly believes that custodians could establish a more unified approach toward their operational cut-off times. The organization posits that an industry standard cut-off closer to that of CLS would be beneficial. This alignment is suggested as one of the essential steps toward mitigating what they perceive as emergent risks born from the T+1 shift.

Reiterating the need for coordination, EFAMA has underscored the necessity for the European Central Bank to assume a more proactive stance in quelling potential risks, suggesting that a collective effort is required to navigate the impending change without negatively impacting the robust trading ecosystems.

Conclusion: The Shifting Sands of Global Finance

As the industry braces for the updates to settlement times, the reverberations will be felt far and wide. The push-and-pull between operational agility, risk management, and the need for international alignment has the potential to redefine cross-border financial activities. While the deadline for the onset of T+1 looms near, the dialogue between EFAMA, CLS, financial custodians, and regulatory entities will prove critical in ensuring that stability and efficiency remain at the heart of global currency markets.

With the international financial community at a crossroads, the days ahead will be pivotal in crafting a pathway that ensures the seamless confluence of market operations, reflecting the interconnectedness of our modern financial era.

©2024 Bloomberg L.P.

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