Global financial markets may witness a pivotal shift as CLS, a multi-currency settlement system for FX trades, is considering a delay in settlement instructions for currency trades.

Adapting to SEC Rules: CLS Addresses Challenges in Currency Trades

This move, under examination in the second phase of a study initiated this summer, aims to address challenges posed by a forthcoming U.S. stock market rule change, as announced by the U.S. Securities and Exchange Commission (SEC). The decision on the potential delay is expected to be reached in the first quarter of 2024.

Currently, currency trades funding securities transactions settle in a two-day timeframe. However, with the impending SEC rule change scheduled for May 2024, which mandates settling U.S. equity transactions one day after the trade (T+1), there is a risk of failed transactions for foreign asset managers.

The study by CLS seeks to determine if its CLS Settlement service can adapt to later submissions for next-day FX settlement without causing market destabilization.

Lisa Danino-Lewis, Chief Growth Officer at CLS, emphasized the need to ensure that all members can implement any changes without causing disruptions. CLS's multilateral netting process, which minimizes risk and enhances cost efficiency, requires participants to submit FX payment instructions by a predetermined time.

The potential delay in the settlement process is being explored to accommodate the new U.S. market rule and maintain seamless operations. "We're as strong as our weakest link. If one of our banks fails to pay in, it impacts everyone," noted Danino-Lewis.

Timing Matters: CLS and the Implications of Adjusting Settlement Deadlines

The SEC's T+1 rule change, passed in February, prompted foreign asset managers to seek CLS's assistance in navigating the transition. CLS estimates that approximately $65 billion per day worth of currency transactions from asset managers could miss the deadline if no adjustments are made.

Currently settling an average of $6.5 trillion in the currency market daily, CLS plays a role in reducing the total funding required to settle each transaction through its multilateral netting process. Responses from the majority of CLS's 74 member banks indicate ongoing discussions about potentially changing the current midnight CET deadline by 30, 60, or 90 minutes. The impact of such adjustments on bank liquidity, funding, and the timing of dealings with foreign asset managers remains a focal point of evaluation.

If the study concludes that a change is feasible, implementation is likely to occur after the deadline on May 28, 2024, offering foreign asset managers some relief in adapting to the regulatory landscape.