Market participants may have underestimated the FX costs involved in the move to T+1 in North America, because they were not the primary focus during the implementation phase, when the emphasis was on settlement efficiency.
This is the view of Gary Wright, director of capital markets industry body ISITC Europe, who says investor costs have risen by around four to five basis points on the back of higher spreads and treasury funding expenses.
But as global financial markets follow North America toward T+1 and eventually real-time settlement, there is a growing need to fuse capital-market assets with liquidity management.
Some markets are already there – India has T+1 settlement and China operates at real-time or T+0. Elsewhere, the UK’s Accelerated Settlement Taskforce has recommended that the UK moves to a T+1 settlement cycle no later than the end of 2027 and European Commission policy officer Sebastijan Hrovatin has stated that the EU could move to T+1 in a similar timeframe.
So what should market participants be doing to mitigate these FX risks – what has worked out, what hasn’t and what practices are most successful?
Liquidity plays a key role
Banks need to be more vigilant in their liquidity-management processes to ensure they have sufficient funds available at the required times.
