On Mar. 14, EFAMA informed of US move to T+1 settlement's risks.
EFAMA said US move to T+1 creates FX settlement risks for European asset managers.
EFAMA issued a policy statement entitled Impacts of the US move to T+1 settlement in Europe-How to avoid a new Herstatt crisis?, re dealing FX trades across time zones.
Follows SEC final rule to B/D settlement cycle from T+2 to T+1, see rule #128801.
Call for Action
EFAMA called on central banks, regulators to consider the FX settlement risk impact.
A recent EFAMA survey of European fund managers estimates that 40% of daily FX flows will not be able to settle through the CLS platform, amounting to USD 50-70 bn.
EFAMA urged central banks and regulators to take a more pro-active role in requiring mitigating measures e.g. CLS cut-off time extension, and improved custodial cut-offs.
This urgency is further compounded by the fact that soon after the US go-live on T+1 implementation, major indices like MSCI World are set to rebalance on May 31, 2024.
Policy Statement
CLS Bank International was set up in 2002, as a private sector initiative, by a number of large global banks; CLSSettlement mitigates settlement risk for market participants.
CLS operates a Payment versus Payment (PvP) system, and relies on a time window when all major central banks’ RTGS (real time gross settlement) are operational.
In order to enable simultaneous settlement across all trade exchange participants.
CLS also offers funding and operational efficiencies by settling via a single platform.
When the US shortens its settlement cycle to T+1, European asset managers, will have a very limited ability to access CLS for their USD trades; CLS access will be reduced.
The inability to use CLS pushes asset managers into costlier and riskier alternatives.
Without necessary adjustments to make the CLS platform accessible, the asset management industry cannot agree that T+1 will make the system safer for everyone.
SEC, NY Federal Reserve, ECB should take a more active role in understanding impacts on settlement risk and to take mitigating measures e.g. CLS cut-off time extension.
And adoption of later cut-offs (more aligned with CLS) by the custodian community.
Effectiveness
The US go-live on T+1 implementation has been scheduled for May 28, 2024.
