FXPA warns of unintended FX settlement risks of T+1 and publishes guidance for buy-side

Rick Steves

These guidelines aim to assist buy-side firms in effectively transitioning to the T+1 settlement cycle, highlighting the importance of preparation to mitigate potential risks and challenges.

The Foreign Exchange Professionals Association (FXPA) has released guidance for buy-side traders addressing the upcoming T+1 Settlement for U.S. and Canadian equities, effective May 2024.

The document, titled “Buy Side Guidance in Preparation for T+1 Settlement,” offers a framework of recommendations.

The unintended FX settlement risks of T+1

The guidance aims to mitigate risks associated with T+1 settlement. FXPA highlights potential operational risks in FX trading processes. These include sales, trading, and settlement operations. The association emphasizes the importance of comprehensive preparation.

FXPA recognizes that T+1 aims to streamline settlements. However, they caution against unintended FX settlement risks. The guidance urges FX traders to review the impact of T+1 on their businesses comprehensively.

The preparation for T+1 settlement should consider several aspects. These include trading relationships, credit, operational processes, funding, and settlement. FXPA sees this as an opportunity for firms to assess the broader implications of faster settlement cycles.

The guidance was developed after feedback from a September 2023 roundtable. This event, focusing on T+1’s impact on FX trading, was a joint effort with the Global Financial Markets Association’s Global Foreign Exchange Division (GFXD).

FXPA has been active since 2014, advocating for the institutional FX market. Its efforts are aimed at promoting a sound, liquid, transparent, and competitive global currency market. FXPA’s membership includes major financial and technology firms. The guidance reflects a collective view but not individual opinions of members.

The FXPA recommendations for the buy-side

The document from the Foreign Exchange Professionals Association (FXPA) provides a comprehensive framework of recommendations for buy-side traders in preparation for the shift to T+1 settlement in May 2024. These include:

  1. Pre-Trade Considerations:
    • Ensure new accounts are fully onboarded and enabled for FX trading and settlement before trading commences.
    • Review the necessity of ISDA/CSA agreements with counterparties for T+1 dated transactions.
    • Assess whether pre-trade netting logic in Straight-Through Processing of FX Orders needs adjustment.
    • Evaluate credit lines, banking, and overdraft facilities, and understand the commitment of funds.
    • Consider the need for a Night Desk or a physical North American presence to manage settlement risk.
  2. Trading Considerations:
    • Be prepared for extended FX trading hours and potential liquidity shortages.
    • Optimize liquidity during busy periods and assess the impact of T+1 on trading relationships.
    • Review the timing of program trades in light of T+1 cutoff times.
    • Explore strategies for processing bulk transactions to mitigate settlement risk.
    • Ensure timely processing of T+1 trades, considering WM and BFIX London 4pm Benchmarks.
    • Consider the implications of rollovers of FX positions and their impact on reinvestment.
    • Corporations should assess how T+1 settlement might affect their public financial reporting.
  3. Post-Trade Considerations:
    • Determine the need for earlier post-trade allocation (PTA) for transactions with tight T+1 processing deadlines.
    • Discuss processing capabilities and cutoff times with custodians.
    • Identify necessary changes in the fund settlement cycle to adapt to T+1.
    • Engage in dialogues with counterparties, custodians, and settlement and clearing service providers.
    • Review post-trade correction and cancellation processes to mitigate potential T+1 issues.

These guidelines aim to assist buy-side firms in effectively transitioning to the T+1 settlement cycle, highlighting the importance of preparation to mitigate potential risks and challenges.

  • Read this next

    Fundamental Analysis

    Global FX Market Summary: EUR, Fed Minutes February 21, 2024

    Hawkish Fed minutes could strengthen USD, dovish BoE hints could boost euro, mixed economic data leaves impact unclear, FOMC minutes release today holds the most weight.

    Digital Assets

    360T launches Crypto NDF offering

    “By launching our crypto offering with non-deliverable derivatives products, we are allowing our diverse, global client base to engage with the crypto market without the need to build or invest in Distributed Ledger Technology (DLT) infrastructure. Looking ahead, we will continue to work with our industry partners to expand 360T’s crypto.”

    Technical Analysis

    FTSE 100 index Technical Analysis Report 20 February, 2024

    The FTSE 100 index is likely to fall to support level 7600.00 after reversing from resistance level 7750.00.

    Retail FX

    Afterprime enhances trade reporting with PrimeXM and TRAction

    “This collaboration has made setting up EMIR and MIFIR reporting for our CySEC entity a breeze, allowing us to maintain our focus on providing best-in-class pricing and top-notch customer service.”

    Market News

    US Market Stocks See a Dip Ahead of FOMC Minutes Announcement

    As the financial world eagerly awaits the release of the Federal Open Market Committee (FOMC) meeting minutes scheduled for today, the S&P 500 index begins trading slightly lower, marking a subtle shift in market sentiment following a prolonged rally.

    Fintech

    Adaptive proves that “the future of finance is in the cloud”

    “While workloads have migrated to the cloud over the past decade, some have doubted whether its latency and fault tolerance can match that of on-premises solutions – our joint testing on Google Cloud, proves that this is the case.”

    Retail FX

    Axi Select offers live trading amid “end of demo account prop firm model”

    “We genuinely empathize with the thousands of talented traders who will now be denied access to their allocated funds, and we encourage anyone using the demo trading registration model to question whether their prop firm partner will be able to continue as an ongoing concern given recent events. Unfortunately, this could be the beginning of the end for the demo account prop firm model.”

    Digital Assets

    Celsius founder Mashinsky agrees to shared lawyers with Sam Bankman-Fried

    Former Celsius CEO Alex Mashinsky has addressed potential conflicts of interest in his legal representation during a brief hearing in a New York courtroom.

    Digital Assets

    Sam Bankman-Fried captured in first jail photo

    Sam Bankman-Fried, the once-billionaire founder of FTX, has been spotted looking quite different with a new beard and a slimmer figure in a photo that’s been making rounds, reportedly taken inside New York’s Metropolitan Detention Centre.

    <