How Will U.S. T+1 Impact the FX Market?

April 17, 2023
Ricky Ellis, Head of BBH FX Sales EMEA, assesses the impact of U.S. T+1 on the FX market and key considerations for asset managers.

From May 2024, the settlement cycle for U.S. security trades will shorten from T+2 to T+1. By allowing for a better allocation of capital, increased liquidity,1 and reduced counterparty credit exposure, the shorter settlement cycle aims to improve efficiencies and reduce risks for both investors and market participants.

It also offers an opportunity for firms to derive additional benefits from automating manual processes and upgrading technology to meet the new timeframe demands.

Implications for the FX Market

While the benefits are clear, adapting to a shorter settlement cycle in such a significant market is not without its challenges. Beyond the settlement, liquidity and operating model impacts, U.S. T+1 will also impact FX trading activity globally. For asset managers and financial institutions in Europe and Asia, the time zone differences make the FX cycle trickier to manage in terms of U.S. settlements and currency conversions.

Since the U.S. equity market closes at 4pm ET (9pm UK/10pm CET), this will leave very little time left on T+1 to match the equity trades and to then generate and execute the FX required to settle the equity trades. For those managers who prefer to execute the FX on T+1, close to the equity trade, it may require a local presence to manage that activity in the U.S. trading day, or the use of an automated or outsourced solution that can support the required trade management and FX execution in a very streamlined and robust workflow.

For European and Asia managers without U.S. trading and settlement capabilities, this poses a challenge and establishing new teams in the U.S. may not be efficient or feasible. Executing late in the U.S. day also creates potential market liquidity implications that need to be understood.

Another option is to accept that the settlement FX will need to be executed on T+0, in the Asian or European morning. This opens other risks such as potentially not being able to rely on risk-mitigation market infrastructure such as Continuous Linked Settlement (CLS).2 Other notable risks include executing and settling ahead of settlement cut-off times, which occur early in the global trading day for Asian currencies.

How Will This Affect Managers With FX Desks?

Broadly speaking, we would expect this change to prompt most managers to initiate a review of their security trading, FX program and trade management processes to validate that all workflows are effective from a risk mitigation standpoint and efficient from the broader operating model view. We also expect this could prompt changes in those workflows.

To accommodate this, larger managers who do not currently have a U.S. presence may look to open a U.S. FX trading desk, to help them trade later in the New York day. Other smaller managers will see this cost as too prohibitive and potentially look to outsource their FX execution needs.

Next Steps

In preparation for U.S. T+1, managers should consider reviewing their current FX workflows, particularly the time of day when they are placing an FX order, as well as their trade management processes. For more information and practical insights on FX and T+1, contact Ricky Ellis, Mark Whitehead, or any of our FX team globally, and follow BBH Market Insights on LinkedIn.

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T+1 Settlement and Beyond

As the world watches the U.S. market plan for a T+1 cycle for securities settlement, other countries are assessing similar moves. BBH is working with clients to help them optimize their global operating models and support their readiness for this major industry shift.

1 A U.S. settlement that opens up liquidity on T+1 could then allow T+2 settlements in Europe or Asia to follow more naturally.
2 Continuous Linked Settlement (CLS) is an international payment system which was launched in 2002 for the settlement of foreign exchange.

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