As the US Securities and Exchange Commission moves towards a shorter settlement cycle for securities trading, some investment managers are contemplating transitioning their funds’ base currency to the dollar. This strategic move aims to mitigate the challenges posed by foreign exchange transactions amid the impending shift to a T+1 settlement cycle starting May 28. Such adjustments are essential to ensure seamless operations and reduce the risk of late payments and failed trades.
In anticipation of the US Securities and Exchange Commission’s implementation of a shorter settlement cycle for securities trading, some investment managers are exploring the possibility of changing their funds’ operating currency to the dollar. This strategic maneuver aims to navigate the challenges posed by foreign exchange transactions amidst the impending transition to a T+1 settlement cycle, slated to commence on May 28.
The rule change, adopted by the US Securities and Exchange Commission last year, mandates securities such as equities to settle one business day after the trade instead of the traditional two, with the objective of reducing market risk. However, this shift presents significant challenges for foreign asset managers, particularly concerning the conversion of their local currency to dollars to facilitate buying and selling of US securities.
Currently, currency trades funding securities transactions settle in two days, requiring investors to adapt to ensure these trades are not excluded from CLS, the largest multi-currency settlement system for FX trades. Operating funds in dollars can mitigate the risk of late payments and failed trades, as managers would no longer need to convert their local currency to the greenback within the shortened timeframe.
Joe Hoffman, Chief Executive Officer at Mesirow Currency Management, noted, “We’ve had some clients with Asian-based currencies change the base currency that they operate in. So, instead of operating in their local currency, changing that to USD will provide some relief.”
This strategic shift underscores the challenges asset managers outside the US face in complying with the rule while mitigating risks in their business dealings. Natsumi Matsuba, Head of FX Trading and Portfolio Management at Russell Investments, highlighted that investment managers are seeking simpler approaches, such as transitioning to USD as the operating currency.
Custodians like BNY Mellon are also exploring solutions to alleviate pressure on investors in Asia by extending settlement cut-off times for some of the region’s major currencies. Ed McGann, Global Head of FX Platforms Sales at BNY Mellon, mentioned that currencies such as the Australian dollar, Japanese yen, and Singapore dollar are among those being extended.
In response to requests from managers overseas, CLS is considering adjusting its deadline for submitting instructions for FX trades for next-day settlement. Marc Bayle de Jesse, CEO of CLS, emphasized the importance of execution and operational efficiency across the asset manager and fund community in navigating these challenges.
As the May deadline approaches, asset managers continue to strategize and collaborate with industry partners to ensure seamless operations amidst the evolving regulatory landscape.
