T+1: What I’d like to hear at SIBOS – part 2

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T+1: What I’d like to hear at SIBOS – part 2

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T+1: What I’d like to hear at SIBOS – part 2

Written by Tony Freemen


Let’s talk about FX – and its T+2 settlement cycle. The initial discussions about the benefits of a move to T+1 in the US focused, almost exclusively, on the risk and cost benefits to the clearing process. The discussion was largely domestic – as if the US market was separate from the rest of the world. In fact, as we all know, the US is the most international market of them all. Perhaps 40% of all activity, measured by value, is generated from outside the homeland.


For those of us steeped in securities market operations FX is an important but not pivotal issue. There is a strong tendency to think of the FX segment as a vehicle to serve the capital markets. This is incorrect. In fact, the FX market primarily exists to grease the wheels of global commerce. And it is vast. According to the BIS in Basel, turnover is $7.5 trillion per day (April 2022) – 30 times greater than daily global GDP. So, it was always a forlorn hope that the FX market would take its lead from the securities market and shift to a T+1 settlement cycle.


I’ve written many times about why it takes two days to settle a FX transaction. The reasons are largely historic and somewhat arcane – telex machines, time zones etc. They are what they are. The reality is that two-day settlement is actually a positive feature for many FX market participants. A palm oil producer in Indonesia selling to a Japanese food producer might need those two days to arrange, execute and settle a FX trade. It would see no benefit in a shortened settlement cycle. The other practical issue is how would it be done? The FX ecosystem is completely different from the equity and fixed-income markets because it has no centralized infrastructure which could force a change.


So, there is no sign whatsoever of a structural shift in FX settlement times. Therefore, the issue is how to make the two markets work efficiently with each other. With only eight months to go before T+1 implementation in North America (don’t forget Canada) there is no clear answer to this question.


So, what should we hope for at SIBOS? If you ask a regulator or policy maker if they’ve thought about the FX problem, you get a very consistent response. They expect a creative response from market participants. In practice this means the big FX banks are expected to fix the problem. The authoritative Euromoney survey lists eight banks and two trading platforms, Jump Trading and XTX Markets, that dominate the FX space. Three of the eight are also leading global custodians – making them ideally placed to provide solutions to their buyside clients.


All eight banks will be in Toronto – as well as CLS Bank. Hopefully, they’ll have something interesting to say.