Treasury/FX/Prefunding Roundtable Summary & Recommendations

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Treasury/FX/Prefunding Roundtable Summary & Recommendations

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T+1 Forum Event hosted by EY

FX Challenges

Treasury/FX/Prefunding Roundtable Summary & Recommendations


In the second of the ISITC Europe T+1 Forum series of roundtables, kindly hosted by EY on the 1st November, industry participants focused on the FX impact of T+1. This post-event summary highlights some of the challenges to FX that will arise from the transition to T+1 and how firms across both buy and sell side can minimise the impact to FX or even use it to their advantage.

The session began by discussing the FX impact of  T+1. Industry participants explained that whilst the specific detail of the impact is not yet certain, there are likely to be significant cash management issues triggered by this move.

Whilst it was caveated that only around 2% of the CLS eligible FX volume will be impacted by the US move to T+1. There was consensus in the room that most players in the industry had at least begun to design a plan to mitigate these risks, potentially by leveraging offshore offices or resource hubs, taking out credit lines to cover the intraday risk, or via funding T+2 trades with the cash from selling T+1 securities. It was agreed that it was critical that market players don’t end up with large overdrafts, but must balance this against increasing operational risk.

The overwhelming conclusion was that all market players need to work together to build an effective and efficient process to determine the optimum time for information to be shared so the FX trade can be settled.

One of the major challenges raised by those around the table was the variation in the processes of each market participant. There is no ability to be generic with a one-size-fits-all approach, an individual conversation needs to be had with each client to be able to determine what will work best for their business.

Aligning execution times between all third parties in a trade can be challenging. An example of this that was raised by the participants was custodian cut off time. CLS cut-off is midnight CET for settlement, however, custodian cut-off times can vary from 30 minutes to 8 hours before the CLS cut off, adding complexity into the market. From the other perspective, custodians explained that these cut off times are due to legal entity challenges and legacy operations embedded within. It is unlikely that the CLS window will be extended, however, this option is currently under discussion with members and regulators and could only be for a maximum of 90 minutes to ensure safe settling.

Other solutions that are being explored include servicing a currency within its own time zone and using subsidiaries to complete transactions.

An additional critical challenge that was mentioned was the lack of liquidity in the market at the end of the New York trading day, the time which will become a critical period for the EU and UK trading teams post-T+1. Whilst there was consensus that this will not be insurmountable and that there will always be enough liquidity to satisfy the market, you won’t always be able to get the best offer. The market will adjust to this over time, as it was agreed that the market always adjusts, but the transition period will commence with increased cost for market participants.

Finally, it is critical that technological advancement is considered as a way to soften the transition to T+1. However, these programmes need to be explored now, as they can take years to be up and running. It is worth noting that there was broad consensus that there are lots of cost-effective solutions available in the market that should be considered alongside building an individual solution.

Resulting recommendations from the discussion

  • Investment in infrastructure and transparency in processes – firms must begin investing in their technology now to ensure they are ready for the transition to T+1.
  • Explore global solutions – don’t make the mistake of focusing solely on the US, future-proof your business and build a forward looking solution.
  • Don’t rely on a one-size-fits-all approach – every market participant is different in how they operate so it is critical that one-on-one conversations are had to determine the best way forwards for their specific business needs.
  • Think short- and long-term – make sure you invest in your long-term strategy but don’t forget to build contingency plans in for the short-term as we go through the transition, e.g. setting up FX desks across the world.
  • Act collaboratively to achieve success – it is imperative that buy side work closely with their custodians and service providers to drive a successful transition to T+1 through lobbying regulatory change and educating wider markets.

The briefing concluded with a review of the impacts to FX discussed in the round table and referenced the multiple solutions that are being worked through, which demonstrate that some of the problems are thought to be not entirely insurmountable.

Sharing information discussed with the wider ISITC Europe community was seen as critical, as many markets have minimal awareness of T+1 and only by the entire market working together, can it transition to T+1 globally as smoothly as possible.

Unfortunately, there was insufficient time to fully discuss the challenges around treasury and prefunding.  Further roundtables, which will include these important issues are being planned by the ISITC Europe T+1 Forum for next year.

If you are interested in participating in the next roundtable, please click the link below to find out further information and request a place. (Please note places are limited and will be confirmed subject to availability)

Data Challenges – 29/11/2023

ISITC Europe CIC would like to thank the T+1 Forum secretariat EY for hosting this series of micro-market roundtable discussions.