CCS trades have notable settlement risk exposure linked to the high value of the initial and final principal exchanges. Settling these trades on a gross bilateral basis also results in operational inefficiencies and liquidity constraints.

The CCS service can be used in conjunction with post-trade processing platform MarkitWire to integrate CCS flows into CLSSettlement, providing the ability for participants to benefit from multilateral netting against all FX transactions.

As a result, this leads to an optimisation of liquidity, alongside a reduction in daily funding requirements.

“We look forward to leveraging CLS’s CCS service to optimise liquidity and mitigate settlement risk,” said Pierre-Jean Benazech, global head cross CCY swaps trading at Société Générale. 

“The unique PvP settlement system and netting capabilities mark a positive step forward in our efforts to optimise our foreign exchange operations.”

Read more: Barclays connects to CLS’s cross currency swaps service

The service has experienced exponential growth, with the values of CCS submitted to CLSSettlement up 87% year-on-year in Q3 2024.

CLS added that the growth in its service also supports the efforts of policy makers and regulators who promote broader adoption of payment-versus-payment (PvP) mechanisms to reduce FX settlement risk and systemic risk in the OTC derivatives market.

“We are delighted that Société Générale has gone live on our CCS service. Participation in the service underscores its effectiveness in enhancing operational and liquidity efficiencies for CCS trades,” stated Lisa Danino-Lewis, chief growth officer at CLS.

“The growing adoption of this service as well as the growing values submitted indicate that FX market participants are actively pursuing innovative solutions to further reduce settlement risk and improve operational efficiency.”

The post Société Générale connects to CLS’s cross currency swaps service appeared first on The TRADE.

The multi-currency settlement system said that June 2024 was a record month with average daily values of $7.8 trillion. 

The initial signs suggest the industry has thus far avoided having to shift to bilateral settlement as FX becomes another area of the markets seemingly unfazed by the transition to a shorter cycle. 

According to CLS, the infrastructure has seen a slight uptick in fund-related submission values to CLSSettlement starting from 14:00 CET onwards, with a more pronounced increase between 22:00 and 23:00 CET followed by a decrease after 23:00 CET.  

CLS explained however, that the initial increase is more significant than the subsequent decline, suggesting no overall loss in submission values.  

“While we cannot definitively attribute the observed growth to the transition to T+1, there are early signs suggesting that the shortened settlement cycle is influencing behaviour within the asset manager and fund communities during this time period,” the organisation said. 

“For example, the increase observed from 14:00 CET could indicate an increase in funds executing the FX component of a security before confirmation of the security trade execution. The increase between 22:00 and 23:00 CET may suggest that funds are still able to submit their securities-related payment instructions to CLSSettlement, possibly due to enhanced process automation and support from global custodians in adjusting cut-off times ahead of the CLS 00:00 CET initial pay-in schedule (IPIS) deadline.” 

Custodians have been praised throughout the industry for their preparation in the build-up to T+1, along with – some of them – being flexible in adapting their deadlines after CLS confirmed it would not move its own at this point, despite calls to do so from the buy-side.  

Prior to the transition to T+1, there were fears that asset managers would face a last-minute scramble to adjust their operations and trading to avoid prefunding, bilateral settlement and moving team members to the US.  

This was largely as CLS issued an update that it would not modify its settlement cut-off post-implementation. There was never a possibility of moving the cut-off prior to 28 May when T+1 came into force.  

At this point, CLS’ decision appears to have been the right move.  

CLS concluded following consultation with its members that the development to accommodate a move in CLS’s initial pay-in schedule – with a deadline of 00.00 CET – would take “considerable time to implement”.  

For some of the larger members, those system developments, and related approvals, could theoretically take between nine and 12 months to roll out.  

Either way, in its internal survey, over 40% of CLS settlement members – representing around 50% of CLS Settlement’s $6.5 trillion average daily value (ADV) – declared that system development may be needed, the infrastructure provider said.  

The post CLS delivers first analysis of T+1 impact on FX settlement appeared first on The TRADE.

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.  

European participants during virtual roundtable discussions run by our sister publication Global Custodian last week 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. 

In addition, The TRADE understands that as of the end of last week, there had been no evidence in an uptick in bilateral settlement in the markets, while some speakers on the roundtables 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.

“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.” 

Holiday worries

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. 

As we mentioned above, there has been little evidence of change with regards to FX settlement, however 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. 

The view from Asia Pacific

The feedback from the Asia chapter of the roundtable discussions was similar, despite the issue being even more prominent given the wider time zone difference.

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 and 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.”  

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. 

The post FX trading has not shifted due to T+1 as some had predicted appeared first on The TRADE.

The whole debacle was sparked by CLS’s reveal last month that it would not be moving its cut-off due to feedback from its members – a decision which surprised and disappointed some – while pointing out that custodians would still be able to tweak their own internal deadlines. The onus is now on these providers to alleviate any workflow issues that may arise for buy-side firms looking to trade around the time of the cut offs – of which there are many.

The result? The buy-side feels its voice hasn’t been heard when looking for support, custodians feel the attention was shifted to their internal cut-offs at the eleventh hour, and CLS is likely feeling stuck in the middle with its hands tied by its sell-side members.

While fingers of blame are being pointed in each direction, the bottom line is asset managers are now facing operational challenges, the notion of pre-funding trades and balancing settlement security with best execution obligations. The idea that more trades might be settled bilaterally also increases the counterparty risk that regulators have been looking to avoid across the industry.

Central to all of this, CLS, the operator of the market’s largest multi-currency settlement system, also probably harbours an element of frustration itself given that an equities problem sprung on this industry by regulators has spilled over into its FX world. And, that it can’t simply make adjustments without due consideration of its membership and the impact on them.

However, it’s difficult not to appreciate the predicament for the buy-side, who now face a last-minute scramble to adjust their operations and trading to avoid prefunding, bilateral settlement and moving team members to the US.

“[We’re] not surprised but disappointed at the way the buy-side concerns appear to have been trivialised,” Adam Conn, head of trading at Baillie Gifford, tells The TRADE.

“The core concern is that if a spot FX trade cannot be cleared through CLS it will need to be settled bilaterally with the FX bank we trade with thus increasing counterparty and operational risk. At this stage of the cycle, it’s more the operational risk but in times of stress that counterparty risk could be just as important. Settling trades gross operationally carries a higher degree of risk than a payment versus payment netting platform which, in my opinion, is really the whole purpose of CLS.”

Baillie Gifford is one of a handful of firms that have opted to open a new trading desk in New York on the back of the US’ move to T+1.

Background of the decision

When the US Securities and Exchange Commission (SEC) announced that the US would move to T+1 settlement for equities in February 2023, a 15-month countdown for preparation began. However, what the regulator probably failed to account for was the knock-on effect outside of the US, and on adjacent processes – securities lending, corporate actions and FX to name a few.

What CLS made clear from the outset was that it would not change its cut-off ahead of the T+1 implementation on 28 May, however, it had reportedly been open with the industry that it would explore a change in its 00.00 CET (6pm ET) deadline – considering 30-, 60- and 90-minute extensions – and promised an update around the end of Q1 2024.

When that update came – with a refusal to budge – the US shift to T+1 was just seven weeks away. CLS concluded that the development to accommodate a move in CLS’s initial pay-in schedule – with a deadline of 00.00 CET – would take “considerable time to implement”. 

Global Custodian and The TRADE understand that for some of the larger members, those system developments, and related approvals, could theoretically take between nine and 12 months to roll out. 

Either way, in its internal survey, over 40% of CLS settlement members – representing around 50% of CLS Settlement’s $6.5 trillion average daily value (ADV) – declared that system development may be needed, the infrastructure provider said. 

For reference, CLS has 76 settlement members, as of December 2023, with 60 of those based outside of the US, Canada or Mexico. 

Why it took 14 months to conclude the survey and come to the decision has become a bugbear for custodians and the buy-side. Of the handful of large US asset servicers we spoke to, many of them stopped short of saying CLS threw them under the bus, however they did feel “the ball was put in our court” – as one source put it.

“CLS essentially implied that custodians could absorb the credit risk of confirming settlement through CLS without being able to appropriately check source of funding,” said another.

Baillie Gifford’s Conn added: “If they set about doing this when T+1 was first announced they would have had time, but they chose not to. The SEC chair has publicly spoken about how T+1 will push infrastructure providers to enhance their service. I’m not seeing it yet. One of the big benefits of T+1 was the argument that it will reduce risk but what we feel is happening is a transfer of risk from proprietary trading strategies and retail brokers to asset managers and their clients. That cannot be seen to be a positive outcome.”

Attention turns to the custodians

Following the reveal of the CLS member survey results, attention has turned to custodian deadlines which fall before the CLS cut-off. It appears a portion of asset managers were unaware these were two different things, given their interaction was with the broker-dealers who were the members of CLS, as opposed to them being direct members themselves.

Not all custodians felt frustration with CLS however, as one source said “what were CLS supposed to do? There are times you could move to which could be totally redundant because there isn’t any liquidity in the market. If liquidity starts to emerge you could move it, but you can’t put the cart before the horse.”

Global Custodian understands from multiple sources that a handful of custodians are moving their deadlines, with those close to the matter referencing ‘positive moves’ on that front. BNY Mellon, for example, has confirmed publicly that it is adding an extra hour for clients to get their CLS-eligible trade instructions to the bank to increase the chances of those trades making the CLS deadline.

In addition, it is also allowing extra time for FX trade instructions it is executing on behalf of clients to come in for same-day settlement, on trades denominated in the Australian dollar, New Zealand dollar, Hong Kong dollar, Singapore dollar and Japanese yen.

Ryan Cuthbertson, global head of custody services, BNY Mellon, told Global Custodian: “BNY Mellon has been advocating for clients to assess their operating models from execution, through to settlement, this includes FX and funding, since the announcement of T+1.

“We are not surprised by the timing of these issues coming to light, instead we see this as the market reacting to final considerations relative to T+1 that participants of financial markets may have to date believed would be ‘swept up’ in custodians processing. We are actually seeing a spike in interest with regards to FX and funding solutions from clients as they come to the realisation that usage of custodians’ balance sheet in the form of end of day credit is not free and is not guaranteed.”

Many other custodians are tweaking their own deadlines as well but have been less public. Global Custodian knows of one custodian moving its cut-off to 5.45pm ET and one to 5.30pm ET. This is also a confusing process however, with some clients allegedly receiving preferential treatment. Long term this could become a contributing factor to further consolidation of smaller buy-side players across the street, emboldening a trend already seen in recent years.

“Custodians are very good at is picking clients off one by one,” says one source speaking on the condition of anonymity. “At the end of the day, it’s a massive spectrum. So, you can already ensure that if BlackRock reaches out to their custodian they would say ‘right, okay, you want it 30 seconds before the settlement cut off – yeah, we’ll live with that’. It’s not been a unilateral broadcast – they will speak to clients one-by-one-by-one and see how they can divide and conquer.”

In truth, it’s probably easier for the asset management clients of custodians to direct their frustration towards CLS – an infrastructure they don’t deal directly with – but CLS has invested in reaching out on an educational front where possible throughout the past 15 months. Its processes, functions and benefits are arguably clearer to the market than ever, while some custodians feel they are closer to the organisation following the lengthy stretch of change.

When asked why not all custodians had moved, one source put it down to “complex funding constraints, high levels of non-standard instructions, or a combination of both”. However, in the past few weeks, the phrase being thrown around plenty is that there are “positive movements” being made by a number of providers. Ultimately, the move could end up reshaping the competitive landscape, as buy-side firms look to interact more with those that have accommodated them during the shift and less with those that haven’t.

Conn explains: “Our goal is to get everything in CLS before that cut-off. Some of the custodian banks that our clients contract with have been very obliging and some others less so in terms of moving their own cut offs before the CLS deadline. I’m certain that a banks’ ability to be operationally sound will definitely have an impact on where we choose to trade going forward. 

“What we and others will be speaking to custodian banks about is their ability to move their own cut off as close to – the CLS cut-off at 6:00 PM ET. The best practise we’ve seen from custodian banks has been to move their cut off time to 5:45 PM ET. It might be too simplistic but if some custodians can do it, I struggle to understand why others cannot.” 

Ultimately, this keeps coming back to increased costs, risk and operational complexities for the buy-side. One of the biggest talking points for asset managers and their custodians is liquidity.

Moving the deadlines is one thing, but they have to coincide with where the liquidity is, otherwise moving the cut-off is a moot point. Moving to 4pm ET isn’t going to make much difference, but every minute counts the nearer you move to 6pm ET.

Buy-side pressure

Many desks are now left with a decision – rush to get everything done within the CLS window or execute outside of it and chance taking on undue risk. If trades head into the US close, asset managers could be left with a tiny window to get an FX trade generated and executed. With additional demand caused by time pressure, there is also the potential for traders to face wider spreads on larger size FX risk at the end of the day.

Once such solution to said problem could be simultaneous execution of equity and currency trades – which are usually done after the fact – to alleviate time pressure.

“We used to trade FX a little bit later and wait until equity trades were confirmed but now we’re speeding it up to do our FX trading at the time of execution which is going to be very helpful for us so we can get those trades funded ahead of the cut off,” Blair Connelly, director, cash and FX management at T. Rowe Price, tells The TRADE. “That’s really what we’ve been focused on, just being proactive and trying to create our own solution internally instead of relying on third parties.”

However, this could leave trading desks subject to increased risk of executing FX trades against unconfirmed or unmatched equity trades.

Among the most central challenges for the foreign exchange market caused by the shift to T+1 is its impact on liquidity and the potential for a shortened settlement window to make the market less attractive to source FX.

Thanks to the UK/EU and US time difference, the shortened settlement timeframe has been flagged by traders as likely to create a “golden hour” of liquidity at 5 pm Eastern Time – otherwise known as midnight in the UK. The result of this, if no other solution emerges, means that for many the prospect of moving FX desks to the US will become a reality.

The prospect of divergence is also still very much on everyone’s minds. While the US shift is imminent, the UK and Europe have opted for a more “wait and see what happens” methodology, leaving trading desks to juggle differing regimes.

With the European market as complex as it currently is, it’s likely the road to implementing T+1 will be a long one. If the EU and the UK don’t follow suit, markets could see a variety of nuances to navigate including in some areas such as ETFs and paper share certificates staying on T+2.

A not insignificant 1%

Pressure ramped up even further on CLS last month when the European Fund and Asset Management Association (EFAMA) released a report estimating that roughly 40% of daily FX flows – representing between $50-70 billion – will no longer be able to settle through the CLS platform, resulting in increased risks.

While this headline stat caught a lot of attention, digging deeper into the report showed that it was actually the inability to meet internal custodian deadlines – based on their trading patterns and relationships – that will mean that 40% of daily FX flows will no longer be able to settle through the CLS platform. 

CLS has said its own research aligned with that of EFAMA’s but stressed that the 40% figure only related to the 1% of CLSSettlement ADV which it believes could be impacted by the move to T+1 and could settle outside of CLS.

So taking holistic view, the impact seems minimal, but if you’re caught up in that not-insignificant percentage which still accounts for tens of billions of dollars, the whole saga has been a point of frustration.

“If they’d [CLS] have put the figure in dollar value it might have been slightly more headline worthy,” says Conn. “In the EFAMA report, US$65 billion upwards a day could potentially settle outside of CLS. That’s a lot of money sitting outside of a payment versus payment network.”

“One percent might not sound like a lot but in notional value it’s probably pretty significant,” adds Connelly. “Depending on somebody’s flow there could be some very big and impactful days, but I think from a market level they’re probably right it’s probably not that impactful. It’s going to have an impact on certain people on certain days.   

“I don’t feel a backlash from our perspective. We understand that the members are the ones that drive the agenda for CLS. They’re the ones that are going to have to make the technology change and the ones who are going to have to spend. They’re valued trading partners of ours so I can certainly understand that there probably is a backlash but from our perspective, I don’t feel that backlash. We’re understanding of it.  

“In 6-12 months, there will be a lot of telling to see who’s right who’s wrong. In terms of the people that think CLS are wrong, when the data comes through that’ll be interesting and I think it’ll be rehashed.”

While the deadline remains firm, CLS has said it will monitor the impact of the shift to T+1 and make assessments on the impact in both June and September, in what it calls more of a “wait and see” approach through “temperature checks”, Lisa Danino-Lewis, chief growth officer at CLS told Global Custodian at the time of the member survey announcement.

“It’s difficult to ascertain exactly what might be related to T+1, because we don’t have that level of detail, but we can look around certain parameters. If we found that  volumes and values stay exactly the same, then we can safely assume that the impact has been negligible. Obviously, if impacted volumes are much higher than expected we’ll reassess it sooner.”

The path forward

In lieu of a change at this point, CLS is reminding members that they can still submit their trades to CLSSettlement up until 06:30 CET for settlement that day. It’s a message they will be reminding the market of for a long time.

“We can’t move if our members can’t move, but there’s nothing that precludes them entering those trades. Within CLSSettlement, members can submit trade instructions up to 6.30am CET on the day of value. It’s really down to each individual member to agree with their clients.”

In addition, CLS highlights that “for same-day instructions that cannot settle within CLS due to custodian cut-off times CLSNet, CLS’s automated and standardised bilateral netting calculation service, can help to reduce funding obligations and the number of payments required by calculating net payment obligations that facilitate payment netting”.

Regardless of who is to blame an equities problem has spilt over into the FX world. Somehow custodians and CLS have ended up between a rock and a hard place, which is fine – unless you’re a matter of days away from one of the largest structural changes in the history of the financial markets.

The post Inside the FX cut-off conundrum sparking animosity between the buy-side, CLS and custodians as T+1 looms appeared first on The TRADE.

The CCS service, which is an extension of CLS’s payment-versus-payment (PvP) settlement service CLSSettlement, mitigates settlement risk for CCS transactions.

Through the integration of CCS flows into CLSSettlement, the offering provides multilateral netting against all other FX transactions, resulting in liquidity optimisation benefits alongside reducing client’s daily funding requirements.

“The adoption of our CCS service by Barclays, one of the world’s premier banking institutions, demonstrates the value and trust placed in our risk mitigation and liquidity management solutions by the industry,” said Lisa Danino-Lewis, chief growth officer at CLS.

“The growing number of institutions, as well as growing volumes on the platform, underlines the industry’s commitment towards minimising settlement risk in the FX market.”

Read more: Three new additions for CLS’ cross currency swaps service

As the industry looks to further mitigate settlement risk, CLS’s CCS services has grown in activity in recent times. Values of CCS submitted to CLSSettlement were up 48% year-on-year last year.

“As markets continue to navigate an uncertain period, being able to mitigate FX settlement risk via CLS’s CCS service is a vital part of our risk management practices,” said Michael Pollak, head of cross currency trading at Barclays Bank.

“Through multilateral netting, we can also optimise our liquidity, reduce our funding requirements and remove friction from the market’s infrastructure. We look forward to the continued benefits the service will bring to our operations and the wider industry.”

The post Barclays connects to CLS’s cross currency swaps service appeared first on The TRADE.

The operator of the market’s largest multi-currency settlement system had been in discussion with members since last year and has concluded that the development to accommodate a move in CLS’s initial pay-in schedule – with a deadline of 00.00 CET deadline – would take “considerable time to implement”.

The TRADE’s sister publication Global Custodian understands that for some of the larger members, those system developments, and related approvals, could theoretically take between nine and 12 months to roll out.

Through its internal survey, over 40% of CLS settlement members – representing around 50% of CLSSettlement’s $6.5 trillion average daily value (ADV) – declared that system development may be needed, the infrastructure provider said.

CLS has 76 settlement members, as of December 2023, with 60 of those based outside of the US, Canada or Mexico.

It was concluded that any changes to the existing CLSSettlement service would also require a comprehensive risk assessment supported by detailed modelling and analysis and, crucially, require the whole ecosystem to make changes to its systems and processes.

CLS had been open with the industry that it would explore a change in its 00.00 CET deadline – considering 30-, 60- and 90-minute extensions – promising an update around the end of Q1 2024. CLS had never suggested the change would come in advance of the 28 May.

While the deadline remains firm, the infrastructure provider will, however, monitor the impact of the shift to T+1 and make assessments on the impact in both June and September, in what it calls more of a “wait and see” approach through “temperature checks”, Lisa Danino-Lewis, chief growth officer at CLS told Global Custodian.

“It’s difficult to ascertain exactly what might be related to T+1, because we don’t have that level of detail, but we can look around certain parameters. If we found that actually volumes and values stay exactly the same, then we can safely assume that the impact has been negligible. Obviously, if impacted volumes are much higher than expected we’ll reassess it sooner.”

In lieu of a change at this point, CLS is reminding members that they can still submit their trades to CLSSettlement up until 06:30 CET for settlement that day.

“We can’t move if our members can’t move, but there’s nothing that precludes them entering those trades. Within CLSSettlement, members can submit trade instructions up to 6.30am CET on the day of value. It’s really down to each individual member to agree with their clients.”

Attention may now turn to custodian deadlines which fall before the CLS cut-off. Global Custodian understands from multiple sources that a handful of custodians are moving their deadlines, with those close to the matter referencing ‘positive moves’ on that front.

The CLS cut-off has been thrust into the spotlight since the announcement that the US would move equities settlement to one day after trade, squeezing timelines around many adjacent processes including FX trades. This is further complicated the bigger the time difference and by the possibility of public holidays.

Pressure ramped up even further on CLS last month when the European Fund and Asset Management Association (EFAMA) released a report estimating that roughly 40% of daily FX flows – representing between $50-70 billion – will no longer be able to settle through the CLS platform, resulting in increased risks.

While this headline stat caught a lot of attention, digging deeper into the report showed that it was actually the inability to meet internal custodian deadlines – based on their trading patterns and relationships – that 40% of daily FX flows will no longer be able to settle through the CLS platform. 

CLS has said its own research aligned with that of EFAMA’s but stressed that the 40% figure only related to the 1% of CLSSettlement ADV which it believes could be impacted by the move to T+1 and could settle outside of CLS.

The infrastructure provider added that more than 50% of asset manager respondents said the majority of their risk can still be mitigated through CLS even without any changes to custodian cut-offs or CLS deadlines, while 35% have not yet decided how to respond to the impact of T+1.

The CLS decision therefore seems to be heavily based around the conclusion that a move would create development burdens for the 99.5% of those unlikely to be significantly impacted is unnecessary at this point.

In a statement, CLS concluded that “for same-day instructions that cannot settle within CLS due to custodian cut-off times CLSNet, CLS’s automated and standardised bilateral netting calculation service, can help to reduce funding obligations and the number of payments required by calculating net payment obligations that facilitate payment netting”.

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The platform standardises and centralises post-trade processes across a range of trade types, including same-day trades and NDFs, which aims to reduce risk and achieve greater operational efficiency for a range of currency flows. As settlement risk in the FX market continues to be a focus, especially in emerging market currencies and other growing segments of the market, participants are looking for ways to mitigate risk effectively via automated post-trade services. 

Lisa Danino-Lewis, chief growth officer at CLS, said: “We are delighted that BNY Mellon is joining CLSNet’s growing community of users and will benefit from the risk mitigation, operational efficiencies and liquidity advantages that the service delivers. In addition to banks, CLSNet is directly accessible to most market participants, including funds, corporates and non-bank financial institutions, making its benefits widely available to the FX industry.”  

CLSNet has experienced record growth this year, with the average daily notional value of net calculations consistently exceeding $115 billion in the last 12 months, and on 20 December 2023 it reached a record daily notional of $445 billion netted. 

Jason Vitale, head of global markets trading, BNY Mellon, added: “We are continuously identifying the latest solutions that will enhance our clients’ experience across the trade lifecycle.  By joining CLSNet, this will enable us to provide clients with improvements in intraday liquidity and execution efficiency.” 

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Regulation will continue to direct market trends in 2024, just as it has in recent years. The knock-on effects from the impending switch in May to T+1 settlement for US instruments need to be monitored and prepared for, particularly in FX. In fixed income, focus will remain on data transparency and whether consolidated tapes would be beneficial or detrimental to liquidity in the EU and emerging markets. Other topics that will continue to garner attention include ESG, peer-to-peer execution and the prevalence and perception of pre-hedging.  

James Maxfield, chief product officer, Duco

In 2024, regulatory challenges will loom large for compliance departments within the financial services sector. Impending deadlines such as T+1 and Emir Refit will be top priorities for firms, demanding action. Against the additional challenge of the current economic environment, there will be a noticeable strain on budgets and resources. In response, organisations will need to work smarter and create the case for transformation to drive automation. This means leveraging technology, automating their infrastructure, and investing in the right areas, to not only meet immediate deadlines but also to proactively navigate potential future requirements like T+1 in Europe, global regulatory changes (such as the wave of refits) and the ongoing industry trend of becoming more data driven (around reporting, supervision and risk).

Transitioning to T+1 may mitigate risks in the trade settlement process; however, it also introduces additional complexity and potentially increased costs elsewhere. Although firms might have an inclination to rely on automation to address these challenges, automating processes with inaccurate data will still result in exceptions that require immediate management on T+0 to meet the new timelines. Firms need to employ a data-centric approach if they are to avoid difficulties in meeting deadlines and fulfilling data requirements. Those that grasp both the challenge and opportunity presented by T+1 will navigate the transition more easily, enjoy its advantages and secure a means to gain a competitive edge. The first half of 2024 will be an opportunity for firms to not only ready themselves for immediate regulatory changes but also position strategically for the evolving landscape of trading in the years ahead. It is time to change the mindset of acting after it’s too late and addressing problems before they arise. 

Lisa Danino-Lewis, chief growth officer, CLS

May 2024 will see the implementation of T+1 in the US and Canada securities market, which will impact FX post-trade. Understanding the extent of the impact is key to helping the industry prepare. As a result, we are engaging with both sell- and buy-side clients to understand the challenges they may face with meeting a shortened settlement cycle and explore how CLS’s current suite of products can assist the market in the short term. We are also conducting a study with our settlement members to assess the feasibility of adjusting CLS Settlement processes to accommodate later cut-off times. As we move into 2024, the T+1 spotlight will broaden to bring the UK, EU and Switzerland into focus, with announcements expected from each as to their intentions with regards to T+1.   

Val Wotton, managing director and general manager institutional trade processing, DTCC

In 2024 we will see the shift to a T+1 settlement cycle in the US, which promises significant advantages for financial markets. Benefits include reduced trade risk, lower clearing fund requirements, improved capital utilisation, and enhanced operational efficiency. However, for those firms who are still using manual post-trade processes, it is critical that they leverage automated solutions to achieve timely settlement. Further, to ensure a smooth transition by the implementation date of 28 May 2024, comprehensive industry testing is essential, covering end-to-end processes from trade execution to trade settlement and non-standard settlement scenarios.

As part of their preparations, it is crucial for market participants to understand what is required of them to comply with the regulatory mandate, including post-trade processes which are unique to the US, such as trade affirmation, which is a critical and unique step in successful trade processing in the region. Assessing operational efficiency and counterparties’ performance is also vital as over time, costs associated with late settlements or inefficient processes can add up. With the T+1 implementation date approaching, it is imperative to act now, understand the impact, test rigorously, and automate post-trade processes for T+1 readiness. 

Mack Gill, chief operating officer at Torstone Technology 

As we look towards 2024, I predict that automation will take centre stage. The ongoing transition to T+1 in North America has been a significant catalyst for the global industry, underscoring the need for more streamlined processes. However, the true game-changer will be the longer-term broader adoption of automation across financial operations. I foresee firms increasingly embracing automated solutions to enhance real-time processing and decision-making.

This shift is not just about keeping pace with regulatory changes; it’s a strategic move to harness greater operational efficiency, risk mitigation, and cost-effectiveness. Automation will play a pivotal role in transforming data management, compliance, and customer service, leading to more resilient and agile financial ecosystems. As the industry gravitates towards even faster settlement cycles and further integrates digital assets, the need for sophisticated, real-time automated systems will become more pronounced. The firms that invest in these technologies will likely emerge as leaders in a landscape where agility and efficiency are paramount. Next year, 2024, could well be remembered as the year when automation reshaped the financial services industry under the banner of T+1.

The post The TRADE predictions series 2024: Market Structure – T+1 appeared first on The TRADE.

The companies have specifically enrolled in its crosscurrency swaps (CCS) settlement service. CCS is an extension of the payment-versus-payment (PvP) settlement service, CLSSettlement, to which the members can now send their cross-currency swaps.

Some of the world’s largest banks already utilise the service which has undergone continued growth in H1 2023, having seen a 38% increase in the values of CCS submitted to CLSSettlement compared to last year.

Lisa Danino-Lewis, chief growth officer at CLS, said: “We are delighted to welcome the latest additions to our CCS service. Their decision to join our platform is a testament to the risk mitigation and liquidity and operational efficiencies provided by the service, and it underscores our clients’ continued commitment to further mitigate settlement risk.”

According to the business, CCS flows are also multilaterally netted against all other FX transactions in CLSSettlement making it a more cost-effective service as regards clients’ daily funding requirements. In addition, it also provides the industry with ‘considerable’ liquidity optimisation.

Speaking to the increasing CCS volumes to CLSSettlement, CLS explained that it would work to support policymakers and regulators in their drive to promote the widespread adoption of PvP in order to reduce settlement risk. 

Jeppe Østerby Thomsen, global head of STIR trading at Danske Bank highlighted the importance of post-trade solutions in the region: “As a leading bank in the Scandinavian region, it is important for Danske Bank to have access to post-trade solutions that deliver risk mitigation and greater cost efficiencies. We are confident that CLS’s CCS service will help us achieve greater efficiency and transparency in our FX operations.”

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Due to the high value of the initial and final principal exchanges, cross currency swaps tend to have significant settlement risk exposure. CLSSettlement offers participants the ability to mitigate the settlement risk associated with these transactions.

The rise in traded values in cross currency swaps submitted to CLSSettlement showcases the industry’s commitment to the FX Global Code’s updated settlement risk principles, which include greater emphasis on the use of payment-versus-payment (PvP) mechanisms where available.

Over the past few years, CLS has seen a number of settlement members join its cross currency swaps service, including HSBC and Goldman Sachs.

“It is clear that settlement members are realising the benefits of submitting their cross currency swaps to CLSSettlement, driven partly by policymakers’ focus on increasing the adoption of PvP settlement,” said Lisa Danino-Lewis, chief growth officer at CLS.

“In addition to mitigating settlement risk, firms sending these trades to CLSSettlement benefit from significantly lower funding costs due to the multilateral netting efficiencies CLS provides. On average, just 1% net funding is required to achieve settlement, which frees up cash flow for other business operations.”

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