The following is a guest editorial by Stephen Totten, Managing Director – Head of Institutional and Quantitative Products at oneZero.
The T+1 settlement for North American securities is almost here, with significant implications for the foreign exchange market. Configurable technology solutions to manage liquidity risk and optimize hedging strategies will be critical for FX traders across regions, according to oneZero.
On Tuesday, May 28, when US markets reopen after the Memorial Day weekend, a major test of global FX liquidity will begin with the arrival of the T+1 settlement for North American securities.
There are indications that some forex market participants will struggle with the move. Trading technology doesn’t have 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 24/7 operation, can be easier than trying to retrofit legacy systems.
Currency liquidity is best when all three global markets – Asia, Europe and the US – are open. Average FX volume falls sharply in the late European afternoon and liquidity is generally poor towards the US close – so it will make sense to hedge trades in US securities once T+1 settlement arrives.
Many legacy e-commerce systems also require a reboot at the end of the day, which can take anywhere from several minutes to over 30 minutes. Some FX end users have tried to avoid this hassle by trading either before or after this window. However, as markets move towards T+1 settlement, these disruptions will often be during the very limited time end users have to hedge their risks.
Restoring legacy systems is difficult and unlikely in the time frame remaining before markets shift. As a fully hosted platform, backed by a dedicated global team of technologists and infrastructure engineers, oneZero can provide significant expertise in integrating core components into clients’ platforms, helping to solve a range of execution and settlement issues.
oneZero can help configure it to run
Automation can help solve many of the challenges ahead for forex markets. oneZero’s Institutional Center allows clients to pre-set configurations to tailor execution to expected liquidity by time zone, for example. These automated setups and similar solutions could help asset managers run the currency risk at the same time as the security trade, giving back-office staff more time to manage the settlement.
oneZero also provides full support for FX exchange trading. This can further optimize execution by allowing US desks to trade on a T+2 basis, normally, and then execute a swap to move their settlement to T+1 in periods of better liquidity.
Breakout support, which allows banks to quote exchange rates on a T+0 basis as late as practicable to ensure they can provide maximum liquidity to their customers.
Automation also brings wider back-office benefits – transactions executed electronically are much more likely to be settled successfully compared to manually executed deals. oneZero’s Hub is fully integrated with a wide range of STP and post-trade solutions, including regulatory reporting, which can significantly smooth the path to T+1.
The move to the T+1 arrangement is expected to follow in other regions in the coming years, with the UK recently announcing a transition target of no later than the end of 2027 and European Union regulators considering a timetable for their own movement.
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 adapt to changing currency liquidity conditions across regions.
Algorithmic trading will be an important part of the toolbox for forex traders based outside the US if liquidity patterns change. oneZero’s Algorithmic Pricing module allows clients to input their own native code for greater control over the underlying data elements when constructing currency rates.
oneZero’s solutions also enable clients to adjust their broader hedging strategies – not just trades that hedge specific US securities deals – to potential changes in currency liquidity.
Perhaps most important of all, oneZero offers authentic, proven continuity of operational support at all times across all regions. oneZero’s 24/7 follow-the-sun global operational support will help give clients confidence that they can minimize any technology issues that could follow a shift in forex liquidity to US trading hours.