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CLS Navigates Regulatory Changes: A Potential Delay in FX Trade Settlements

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.

CLS to decide whether to delay FX settlement cutoff in Q1 - https://t.co/bjZoJIYru4

— Investing.com News (@newsinvesting) December 4, 2023

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 May 28, 2024, deadline, offering foreign asset
managers some relief in adapting to the regulatory landscape.



This article was written by Tareq Sikder at www.financemagnates.com.