Scott Gold, Head of Americas Sales, SGX FX
With less than 10 days until the accelerated (T+1) settlement cycle for US equities and fixed income, there is no denying the urgency of dotting the I’s and crossing the T’s in final preparations. Asset managers outside the US find themselves on the front lines of significant upheaval, facing a myriad of challenges due to time zones. What is particularly interesting is that the mood of market participants across continents reveals a common thread of anxiety, accentuated by the absence of perfect solutions. However, amid the hectic final days, opportunities for nuance, as opposed to wholesale change, could drive efficiencies for cash equity and fixed income desks as well as FX.
For example, when purchasing S&P 500 stocks or Nasdaq stocks, an important consideration is how you conduct your FX trades to raise the currency you need. Asset managers, especially those based in Asia-Pacific and Europe, are rising to the occasion to match equity trades and execute the foreign exchange trades needed to raise dollars to settle U.S. stocks. That's going to happen. Many non-U.S.-based asset managers, especially those with small assets under management (AUM) and limited resources, are finding short-term options to open U.S.-based offices or have their FX traders work U.S. time. We are considering possible solutions. This is because the time it takes for an FX trade to complete and complete is short, from 4pm to 6pm New York time. This is certainly an option, but not ideal at all.
A more common approach, common among Asia-based funds, is pre-funding. Pre-funding in FX is the provision of sufficient funds in an account to ensure that the necessary funds are available to execute stock and bond trades without delay or risk of failure. means. On the surface, this seems like the most logical option, but pre-funding comes at a cost. Investment managers who put money upfront can only cover about 75-80% of the required exchange. The remaining 20-25%, known as “adjustments”, must be made between the all-important 4pm (EST) stock market close time and the Continuously Linked Settlement (CLS) 6pm (EST) window. There is. Because global markets are not open during this period, approximately less than 1% of the $7 trillion OTC foreign exchange market trades are executed during this period, making execution costs very high. This cost is exacerbated at 5pm EST, when most large investment banks shut down their market pricing engines for up to 30 minutes.
All this means that liquidity will be further reduced between 5pm and 5.30pm as banks assess the reopening of their trading systems. As a result, bid/ask spreads widen and liquidity tightens, leaving traders worried that their performance will be revised during a small window in which it is nearly impossible to realize large returns. Masu. Then there's her third option for pre-funding. This involves the asset management company outsourcing all foreign exchange transactions to the custodian bank. However, just like going the 100% pre-funding route or flying your Forex trader to the US, relying entirely on a custodian approach is not ideal. Because the fund manager could end up filling at a much worse price.
This begs the question – what is the ideal approach? Much of a successful transition to T+1 depends on technology. While a complete overhaul of the technology stack may not be possible, asset managers can make incremental changes to their FX workflows to reduce operational risk and limit the additional FX-related costs introduced by T+1. There is a real opportunity to add.
For example, one particular area that can make a noticeable difference from day one is around rule-based execution. Investment managers who pre-fund must know which currency pairs are most liquid and when spreads are tightest, with a unique timeline for their customized liquidity. You can then create automations to execute FX during peak hours, reducing wake-up calls that traders might otherwise have in the middle of the night. Additionally, this reduces the time it takes for traders to search for the best execution method. Detailed insights such as when an asset manager trades a particular currency pair and where liquidity providers are pricing the asset manager throughout the trading day are also important, leading to lower execution costs. Masu. Another technology that has not been adopted by the real money community is mobile apps. For traders who work odd hours or are forced to log in in the middle of the night, being able to see just their orders on a mobile device and have the peace of mind that automation is working as expected is a huge added value. .
There is no doubt that the transition to T+1 payments presents complex challenges for asset managers, especially those operating outside the United States, but at the same time it is not a wholesale transformation; It also heralds an era of potential technological sophistication. As these managers overcome time zone constraints and liquidity bottlenecks, they are mitigating the risks and costs associated with new settlement cycles by introducing incremental technology-driven solutions such as rules-based execution and pre-funding. It can be reduced. The last few days leading up to T+1 may not be seamless, but they are a pivotal moment for asset managers to improve the efficiency of their FX trading. Ultimately, companies that focus on subtle advances will be better positioned to succeed in a post-T+1 world.
