T+1 sets up headache for cross-currency trades

In February, the Securities and Exchange Commission (SEC) adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1). The compliance date for the final rules is May 28, 2024.

While the merits of this move have been widely debated, one aspect that has received relatively little attention is currency conversion. BBH’s European custody product manager, Derek Coyle, has previously pointed out that a shorter settlement cycle impacts cross-currency transactions which have an FX component, with FX trades either needing to be booked on the same day or pre-funded.

Executing late in the US day creates potential market liquidity implications

Chris Gothard, BBH

“With a shorter settlement window there is less time to remediate breaks,” says Alex Knight, head of sales and EMEA at Baton Systems. “Those trading in US securities from outside the US need to factor in time for FX settlement to ensure they have the cash to settle their transactions.”

The global FX division of the Global Financial Markets Association has suggested that accelerating securities settlement to T+1 raises the risk that transaction funding dependent on FX settlement may not occur in time, with trade matching, confirmation and payment all having to be completed within local currency cut-off times.

Alex