Managers explore dollar shift to handle faster US stock settlement

[March 04, 2024]  By Laura Matthews

NEW YORK (Reuters) - Some investment managers are looking to change the currency their funds do business in to the dollar to prevent their foreign exchange transactions from failing when U.S. securities move to a shorter settlement cycle this spring, specialist currency managers said.

The U.S. Securities and Exchange Commission adopted a rule change last year for securities such as equities to settle one business day after the trade, or T+1, instead of two, starting on May 28. It is aimed at reducing market risk.

However, the shift is raising some challenges for foreign asset managers who must swap their local currency for dollars to fund their buying and selling of U.S. securities, managers said.

Currency trades funding securities transactions currently settle in two days, and investors must make changes so those trades are not left out of CLS, the largest multi-currency settlement system for FX trades.

Operating the funds in dollars can reduce the risk of late payments and failed trades because managers would not need to convert their local currency to the greenback in the shortened time frame, managers said.

"We've had some clients with Asian-based currencies change the base currency that they operate in," said Joe Hoffman, chief executive officer at Mesirow Currency Management. "So, instead of operating in their local currency, changing that to USD will provide some relief."

The move shows how asset managers outside the U.S. are grappling to find the best solution for complying with the rule while avoiding creating risk elsewhere in their business dealings.

"Generally speaking, investment managers are trying to take a more simple approach, which is to change the operating currency to USD. There are some thoughts around avoiding trading around market holidays, though this solution is a higher hurdle to overcome," said Natsumi Matsuba, head of FX trading and portfolio management at Russell Investments.

Signage is seen at the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo

Matsuba said a small number of asset managers that Russell works with globally are negotiating with their clients to see if they can change their base currencies.

Custodians like BNY Mellon are also looking at ways to give investors in Asia some reprieve by extending the settlement cut-off times for some of the region's largest currencies by about two hours.

Ed McGann, global head of FX platforms sales, at BNY told Reuters that the Australian dollar, the Japanese yen and the Singapore dollar are among the currencies being extended.

"The later window will allow for same-day executions to continue later into the day," McGann said.

At the request of managers overseas, CLS has been exploring adjusting its deadline for submitting instructions for FX trades for next-day settlement. It estimates about $65 billion per day worth of currency transaction from asset managers could miss the deadline.

Marc Bayle de Jesse, CEO of CLS said he does not foresee an operational change ahead of the May deadline, and that CLS continues to partner with the market to explore possible solutions to address the challenges.

"In the meantime, execution and operational efficiency across the asset manager and fund community will be paramount," said Bayle de Jesse in a statement to Reuters.

(Reporting by Laura Matthews; editing by Megan Davies and Josie Kao)

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