Specialist currency managers said some investment managers are considering changing their funds' currency to the dollar to avoid foreign exchange transactions failing when U.S. equities settle in a shorter cycle this spring.
The SEC changed its rule last year to settle securities like equities one business day after the trade, or T+1, instead of two, commencing on May 28. To reduce market risk.
Managers said the shift is challenging foreign asset managers who must exchange local currency for dollars to acquire and sell U.S. securities. Currency trades funding securities transactions settle in two days, therefore investors must change to include them in CLS, the largest multi-currency FX settlement system.
Investment managers usually alter the operational currency to USD to simplify. Natsumi Matsuba, head of FX trading and portfolio management at Russell Investments, suggested avoiding trading on market holidays, but it would be harder to implement.
"We've had some Asian-based clients change their base currency," said Mesirow Currency Management CEO Joe Hoffman. "So, instead of operating in their local currency, changing that to USD will provide some relief." This indicates how asset managers outside the U.S. are trying to comply with the law without generating risk in their business transactions.
BNY Mellon is also considering extending the settlement cut-off times for some of Asia's top currencies by two hours to provide investors some relief. BNY global head of FX platforms sales Ed McGann told Reuters that the Australian dollar, Japanese yen, and Singapore dollar are extended. "The later window will allow for same-day executions to continue later into the day," McGann.
CLS is considering the deadline for FX transaction instructions for next-day settlement at the request of managers overseas. Asset managers may miss the deadline with $65 billion in currency transactions every day.
CLS CEO Marc Bayle de Jesse said he does not expect an operational change before the May deadline and that CLS is working with the market to find alternatives. "In the meantime, execution and operational efficiency across the asset manager and fund community will be paramount," Bayle de Jesse told Reuters.
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