T+1 Settlement: Is Your FX Trading Impacted With the Equity Settlement Shift to T+1?

In February 2023, the Securities and Exchange Commission adopted rule amendments to shorten the standard settlement cycle to T+1 for transactions in U.S. securities including equities, corporate bonds, unit investment trusts, and exchange-traded funds.

The Canadian securities markets have followed suit and adopted a T+1 settlement cycle effective May 27, 2024. U.S. implementation will be a day later, May 28, 2024, due to the Memorial Day holiday.

How does T+1 impact foreign exchange (FX)?

The shift to T+1 will represent a shortening of execution and delivery time for market participants. It will present additional challenges, especially for those that invest in the U.S. and Canadian markets with a non-USD/non-CAD operating currency.

There will be additional hurdles for investors acquiring U.S. and Canadian equities with a local currency based out of Asia and EMEA – specifically around bank holidays in their local base currencies.

Custodian and CLS cut-off times

From the time U.S. and Canadian equity markets close (10pm CET / 4pm ET), there is just one hour to trade FX, and correspondingly one hour to submit those FX trade details for CLS (Continuous Linked Settlement) processing (midnight CET / 6pm ET) – the most efficient method for settlement.

Although there are talks for CLS to extend their cut-off time by 90 minutes, this extension will not help if the custodian banks' cut-off time is earlier than that of CLS.

Compounding the issue, when there are local holidays (non-U.S. / Canada), the T+1 trades will shift to T+0 settlement and purchasing of securities will require funding prior to the equity market close.