Investing in US Securities? Something is Stalking You …

Kayaking on Sydney Harbour on a beautiful blue-sky morning in February 2023, an unnerving wave of dread swept over me. A feeling I was being stalked by something I wasn’t prepared for. Slowly, silently, edging closer and closer. Until it was right on my tail. What was coming was exceedingly dangerous … but only if I wasn’t ready for it.

It wasn’t an ocean predator.

In fact, I wasn’t worried at all about the animal following my kayak that morning. The curved dorsal fin told me it was a Bottlenose dolphin, more likely wanting to kiss me than kill me.

No, the cause of the dread that morning was the announcement from the US Securities and Exchange Commission earlier in the day that they would be reducing the settlement cycle for US Securities from T+2 to T+1. The SEC announced this halving of the time firms had to settle US Securities transactions would be implemented in May 2024. The clock was ticking for anyone trading in US Securities to ensure they were ready. For non-US persons trading US Securities, this also has a big impact on their FX hedging and overlay activities.

Our team at 26 Degrees executes billions of dollars of global equities and ETFs annually for our institutional clients. We transact billions of dollars a day in FX and metals. This was going to be a big lift for everyone in the team. We needed to update and test systems - recruit staff to handle the expected increased volumes and assist our clients in identifying the impact of, and opportunities presented by, the T+1 change.

Fast forward to today and we are ready. Clients are prepared and systems are in place to support new workflows.

Surprisingly, the biggest, and least prepared for, impact of the changes seems to be the impact on FX markets – specifically, the need for any non-US investor in US Securities to review their FX hedging activities to ensure they can cope with a dramatically reduced window for clearing any FX hedges. Market commentators are predicting that in the hours immediately after the NY close, the traditionally illiquid Sydney/Asia timezone is likely to see much greater volumes transacted, as international institutions scramble to hedge USD equities exposures after NY close, but in time to catch the CLS settlement cutoff an hour later (expected to be extended by CLS).

Deal with the dread

So – what are the main things we have learned and what should you be doing to deal with the dread?

· The changes will create an FX market “Liquidity Witching Hour” – which might be extended to three hours by the CLS.

· This timezone is traditionally the most illiquid period of the 24 hours in FX.

· Experts with experience in executing into this unique timezone have suddenly become sought after.

· Do you have FX execution expertise in Sydney/Asia? Have you researched an outsourced execution solution?

· Ensure your broker is ready, and their own workflows will allow you to settle your Securities (and FX) in time.

· Consider switching to using swaps/CFDs/synthetics to trade US Securities instead of cash. These instruments may reduce the FX exposure associated with investing in securities outside your home domicile.

Where can 26 Degrees help?

We are a technology-focused, independent prime broker with over ten years of award winning history serving Institutional clients globally. Headquartered in Sydney with a Tokyo office and Cyprus subsidiary, we are uniquely placed to assist our clients deal with the nuances of the upcoming changes, particularly the impact on FX liquidity and execution in the post-NY hours.

If you would like to know more about our industry-leading capabilities, contact us here.