By Laura Matthews
NEW YORK (Reuters) - CLS, the largest multi-currency settlement system for FX trades globally, will decide in the first quarter of 2024 if it can delay settlement instructions for currency trades, potentially giving some reprieve to foreign asset managers at risk of failed transactions because of a U.S. stock market rule change.
Currency trades funding securities transactions currently settle in two days. Investors must change their methods so those transactions are not left out of CLS, missing out on cost efficiency and risk mitigation, when the U.S. Securities and Exchange Commission rule change kicks in next May.
CLS is entering the second phase of a study that began this summer to determine if its CLS Settlement service can accommodate later submissions for next-day FX settlement without destabilizing the markets, Lisa Danino-Lewis, chief growth officer at CLS told Reuters.
Should it conclude the change is possible, a solution could be implemented likely after the May 28, 2024 deadline for settling U.S. equity transactions one day after the trade (T+1).
"We need to make sure all members can implement any changes that we agree on," said Danino-Lewis. CLS's multilateral netting process requires all participants submit FX payment instructions by a pre-determined time. Multi-lateral netting enables them to only transfer the net amount of their combined payment obligations in each currency, which reduces the total funding required to settle each transaction.
"We're as strong as our weakest link. If one of our banks fails to pay in, it impacts everyone."
CLS has received responses from the majority of its 74 member banks asked about the impact of changing the current midnight CET deadline by either 30, 60, or 90 minutes.
CLS is looking to see how that would affect, among other things, bank liquidity, funding, and timing when dealing with foreign asset managers.
The SEC passed the T+1 rule change in February, prompting foreign asset managers to ask CLS to see what it could do to help ease the transition.
CLS estimates about $65 billion per day worth of currency transaction from assert managers could miss its deadline. Some $7.5 trillion is transacted in currency market daily, of which CLS settles an average of $6.5 trillion.