CLS delivers first analysis of T+1 impact on FX settlement

The multi-currency settlement system has seen no decrease in values or volumes suggesting no shift to bilateral settlement, though some trends are emerging with regards to submissions to CLS.

CLS saw no decrease in average daily settlement values and volumes over the first month of T+1 in the US, though some trends have been emerging. 

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.