At major financial institutions including banks, brokers and investment houses, currency desks are preparing for the world’s biggest stock market to halve the time it takes to settle equity transactions to just one day.
“The real squeeze for us is going to be getting the FX trade executed, matched and away to custodians in time,” said Catriona Lawlor, a trader at the $293 billion firm. She’s one of three Baillie Gifford employees moving to the US to help ensure the asset manager’s currency needs can be fulfilled in the accelerated timetable.
The upheaval stems from SEC regulations that will expedite the settlement time-cycle for US securities — that is, the time between when the trade occurs and when payment is received and ownership of the asset is transferred. The shift will move the market to what’s known as T+1, after it transitioned to T+2 back in 2017.
“For international participants wanting to buy US securities, pre-funding the transaction with US dollars or arranging for a short-dated T+1 FX settlement will be required,” said Joe Urban, managing director of electronic trading at Clear Street. “Any pre-funding requirement could potentially push asset managers out of the market for one day, driven by the need to raise US dollars a day prior for today’s transaction.
Urban said he has “heard discussions” from both buy- and sellside firms about ensuring sufficient staff are available to trade the US close. He expects to see the buyside in particular turn to outsourcing relationships to ensure its funding coverage. Alex Knight, head of EMEA at post-trade processing company Baton Systems, reckons moving staff to the US is little more than “throwing headcount” at the problem. He’s advocating for distributed-ledger technology to speed up so-called payment-versus-payment transactions, a settlement mechanism that coordinates transfers to ensure no one is left holding a claim.