CLS will not make any changes to the current FX settlement cut-off after consultation with its members, putting an end to talk of an extension to ease concerns around timings for the impending shift to T+1 for US equities, now just seven weeks away.
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”.