T+1: How Are Asset Managers Adapting Their FX Workflows?

December 22, 2023
  • Investor Services
As the T+1 deadline approaches, BBH’s Ricky Ellis analyzes the important FX workflow decisions managers have made, the solutions that are taking shape, and the challenges that lie ahead.

T+1 planning has continued to progress since we first assessed the impact on the FX market in April 2023. Asset managers have now made some important workflow decisions and their strategies for adapting FX solutions are taking shape.

In this latest article, we explore these differing strategies, the associated costs and benefits, as well as the challenges that still lie ahead as we approach May 2024.

Building an FX Workflow: No One Size Fits All

While the T+1 change is happening in the U.S. and Canada, the implications due to the time zone difference are most severe for those managers in the U.K., Europe, and Asia. How they have approached solutions for the T+1 settlement transition and plan to adapt their workflow has differed depending on their individual priorities.

When making the important decision of how they will trade their security-related FX in a post T+1 world, managers have carefully considered and balanced key factors including: liquidity, latency, settlement, trading off matched security trades versus pre-funding, competitive dealing, and their appetite for automation and outsourcing of FX execution.

Broadly speaking, managers have focused on several approaches to solve for T+1:

  • Open a North American FX trading desk. Staff accordingly to trade FX in the New York time zone (specifically 4-5 p.m. ET)
  • Automate or outsource their FX workflow so they can execute FX closer to U.S. equity trades without human involvement
  • Trade a larger percentage of their volume direct with their custodian(s), negating same day third-party cut-off times
  • Pre-fund trades instead of executing FX from a matched security

Let’s take a closer look at a few of these strategies.

Opening a North American FX Trading desk

Several of the larger U.K. and European managers have decided to open FX trading desks in the U.S. to solve for T+1, while others are looking at running night desks to achieve the same goal.

Despite significant costs, the benefits are obvious. The U.S. and Canadian equity markets close at 4 p.m. ET, so having FX traders in North America allows managers to execute FX late in the U.S. afternoon for T+1 settlement and before the deadline to utilize CLS.

However, with FX end-of-day (EOD) at 5 p.m. ET and CLS cut-off so far remaining at 6 p.m. ET (midnight CET), conducting a significant portion of U.S. equities market-on-close (MOC) will require a quick turnaround time. Managers will have just one hour to match security, create, and then execute the FX trade, with an additional one hour post execution to settle via CLS.

There has also been much discussion in the market of what that one-hour FX trading window - named the “Golden Hour” between 4 and 5 p.m. ET - will look like post T+1, with more Real Money market participants choosing to trade during that time.

Liquidity has been historically poor in late U.S. afternoon, especially on Fridays, but this is expected to improve with the anticipated additional flow. The extent of such improvement however will be of keen interest for those looking to trade FX during this time, as well as others assessing the 24-hour FX liquidity paradigm.

It also raises the question of whether we will see U.K./European Real Money names notably buying USD during this “Golden Hour” window. In addition, there is potential for other wider participants in the FX market with USD to sell to view this window as a natural offset and also change their execution behavior accordingly.

Overall, this solution to T+1 will not be for everyone. Managers need to consider the additional head count costs of having FX traders in North America, alongside the necessary support infrastructure that comes with it across operations, systems, and oversight. There may also be additional regulatory and tax implications that would need to be considered and these will differ for each individual manager.

Outsourcing FX Workflow

Some managers have looked to outsourcing to solve for T+1. A benefit of this approach is that they can set up automated execution sweeps during the U.S. afternoon and Asia session without physically having FX traders in those regions.

This approach could also have the added benefit of future proofing your FX program, not just for the pending T+1 change, but also for any proposed future changes in other markets or to potential T+0 simultaneous settlement.

For many managers this will be the first time they have looked to outsource their FX execution. Therefore, it’s critically important to research and evaluate your options in this segment while partnering with a firm with a long-standing history and reputation in the space.

Client control, comprehensive reporting, and operational efficiency is of the essence, backed up with market expertise and a strong desire to uncover new sources of value for those clients.

Important considerations for evaluating an outsourced FX program include:

  • Client customization
  • Third party capabilities to net/aggregate FX flow across all accounts and support multi-custodians
  • Ability to include all security and corporate action related FX
  • Ability to support select Restricted Markets
  • Trading expertise
  • Dedicated relationship management and product development teams

Trading With Custodians

While opening a North American trading desk and outsourcing are likely to be the two most high-profile solutions for T+1, some managers have indicated they will trade more of their FX flow direct with their custodian(s).

With U.S. and Canadian equities moving to T+1, the knock-on effect for those looking to trade the following European morning is that the associated FX will need to be executed with same day T+0 value.

Trading FX T+0 requires consideration of third-party cut-off times and precludes settlement via CLS. Managers will also need to prepare to accommodate for non-U.S. and Canadian FX holidays, and potentially pre-fund in certain circumstances.

Managers looking to adopt this approach of trading FX for T+0 settlement will likely look to trade third-party across bank partners where they can. However, they ultimately may need to increase their flow to their custodian(s) where third-party cut-offs don’t apply.

As such, while this solution could save managers the upfront costs of amending an existing FX workflow, the trade-off could include a reduction in execution efficiency, especially in terms of latency and netting capabilities. For those managers with multiple custodians, this also may increase trader workload.

For more information and practical insights on FX and T+1, contact Ricky Ellis, Brendan Burke, Mark Whitehead, Munenori Yoshihara, or any of our FX team globally, and follow BBH Investor Services on LinkedIn.

""
Up Next
Up Next

How Will U.S. T+1 Impact the FX Market?

Ricky Ellis, Head of BBH FX Sales EMEA, assesses the impact of U.S. T+1 on the FX market and key considerations for asset managers.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2023. All rights reserved. IS-09547-2023-12-22

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction