(Bloomberg) — CLS, the world’s largest foreign-exchange settlement firm, is racing to figure out a way to get the $7.5 trillion-a-day currency market ready for a huge change to trading in US stocks.
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The US is less than four months from introducing what’s known as T+1, when it will halve the time it takes to complete equity transactions to just one day. The move will leave the world of foreign exchange — where trades typically take two days to complete — out of step.
Overseas investors buying US assets will need to secure dollars faster to complete deals, creating a desperate scramble and the increased risk of failed trades. CLS, which settles more than $6.5 trillion daily through its systems, says about one third of asset managers aren’t ready. It estimates around $65 billion of the trades it processes could miss the cut-off time for next day settlement.
One option is for CLS to extend its deadline to 6 p.m. in New York. Liquidity is often lower in the late US afternoon — the so-called witching hour — and the extra time would give investors a bit more leeway to secure the cash they need.
CLS is surveying members and is set to announce if it will push back its deadline by 30, 60 or 90 minutes, or leave it unchanged, at the end of this quarter. Right now, it looks like one of those is off the table.
“Looking at the responses so far, a 90-minute extension is out of the question,” said Lisa Danino-Lewis, chief growth officer at CLS, who’s been jetting around the world in a dash to assess the readiness of the industry. “We can’t introduce risk into the system.”
Transformative Change
Given its scale, CLS is a vital part of finding a way to deal with the upcoming shift, which Bank of New York Mellon Corp. has called the most transformative change since the onset of electronic trading in the early 2000s.
“The market is waiting for a golden ticket solution and there isn’t one,” Danino-Lewis said. “It would be helpful if CLS could be that solution but even if we do move the deadline, there are multiple factors that need to be in place for it to work.”
Asset managers access CLS via its 74 members, which include banks such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. But all of them need to be able to accommodate the later deadline and some banks have said it will take them a year to be ready, according to Danino-Lewis.
This means even if CLS does decide to push back its deadline, implementation wouldn’t happen in 2024 and asset managers would have to seek alternative means of settlement.
Cut-Off Times
“From an operational risk point of view, there’s issues around the fact these trades could fall out of CLS,” said Gordon Noonan head of foreign exchange trading at Schroders. “It’s a bit of a retrograde step for the market — in an ideal world we would still be able to settle those trades in CLS.”
As the clock ticks down, CLS settlement members are busy readying their systems in a bid to ease its asset manager clients through the transition.
“We have been working to assess and minimise any potential impacts for a while — making structure and procedural changes where needed,” said Graham Sorrell, head of equity, currency and derivatives trading for EMEA and APAC at State Street Global Advisors. The changes include measures to speed up trades and alert staff of key settlement cut-off times.
Still, part of the issue complicating CLS’ deadline move is that some settlement members have their own earlier cut-off time for asset management clients, meaning they may not benefit from the deadline extension.
“The discussion around extending our deadline is irrelevant if we can’t get the custodian banks to be more liberal with their own cut-off times,” Danino-Lewis said. “The buyside is definitely starting to be more vocal on the need for visibility and it’s how custodians attract business.”
(Updates to add chart on daily settlement by currency.)
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