FX liquidity test looms as North American T+1 settlement arrives

The following is a guest editorial courtesy of Stephen Totten, Managing Director – Head of Institutional and Quantitative Products at oneZero.

T+1 settlement for North American securities is almost here, with major implications for the FX market. Technology solutions that can be configured to manage liquidity risk and optimize hedging strategies will be vital for FX traders across regions, according to oneZero.

Tuesday May 28, when US markets reopen after the Memorial Day long weekend, will see the start of a major test for FX global liquidity, with the arrival of T+1 settlement for North American securities.

There are signs that some FX market participants will struggle with the move. Trading technology does not need to be one of the areas of concern, and integrating key modules from a system like oneZero’s, which is designed for rapid deployment and continuous 24/7 operation, may be easier than attempting to retrofit legacy systems.

FX liquidity is best when all three global markets – Asia, Europe and the US – are open. Average FX volumes fall sharply at the end of the European afternoon and liquidity is generally poor towards the US close – which is when it will be logical to hedge US securities trades once T+1 settlement arrives.

Many legacy e-commerce systems also require an end of day restart which ranges in time from several minutes to upwards of 30 minutes. Some FX end users have tried to dodge this inconvenience by trading either before or after that window. However, as the markets move to T+1 settlement these outages will often be during the very limited time end users have to square their risks.

Remediating legacy systems is challenging and unlikely within the timeframe left before the markets shift. As a fully hosted platform, backed by a dedicated global team of technologists and infrastructure engineers, oneZero can offer significant expertise in integrating key components into clients’ platforms, helping to solve a range of execution and settlement issues.

oneZero can help with configuration for execution

Automation can help solve many of the approaching challenges for the FX markets. oneZero’s Institutional Hub allows clients to set configurations in advance to adapt execution to expected liquidity by timezone, for example. These automated settings and similar solutions could help asset managers execute their FX risk simultaneously with the security trade, giving back-office staff more time to manage settlement.

oneZero also provides full backing for FX swap trading. This can further optimize execution by allowing US desks to trade on a T+2 basis, as normal, then executing a swap to roll their settlement to T+1 during times with better liquidity.

Cut-off support, which allows banks to quote FX prices on a T+0 basis as late as is practically possible, to ensure that they can provide maximum liquidity to their clients.

Automation also brings wider benefits for the back-office – trades executed electronically are significantly more likely to settle successfully compared to manually executed deals. oneZero’s Hub fully integrates with a wide range of STP and post-trade solutions, including for regulatory reporting, which can significantly smooth the journey to T+1.

The shift to T+1 settlement is expected to be followed in other regions in the coming years, with the UK recently announcing a target transition date of no later than the end of 2027 and European Union regulators examining a timeline for their own move.

oneZero also guarantees 24/7 follow-the-sun service

oneZero has a 15-year track record of developing new technology solutions that help our 250+ clients to adapt to changing FX liquidity conditions in all regions.

Algorithmic trading will be an important part of the toolbox for FX traders based outside the US if liquidity patterns shift. oneZero’s Algorithmic Pricing Module allows clients to insert their own native code for greater control of underlying data elements in constructing FX prices.

oneZero’s solutions also allow clients to tailor their broader hedging strategies – not just trades that hedge specific US securities deals – to potential changes in FX liquidity.

Probably most importantly of all, oneZero offers genuine, tested continuity of operational support at all times in all regions. oneZero’s 24/7 follow-the-sun global operational support will help to give clients confidence that they can minimize any technology issues that could follow a shift in FX liquidity to US trading hours.