Navigating FX Trends: From T+2 to T+1 Settlement Cycles

The foreign exchange market is undergoing significant structural transformations. Carolina Trujillo Escudero, Head of e-FX Distribution at SEB, shares her thoughts on challenges and opportunities in the global financial landscape. 

One of the most apparent trends in FX is the shift for US Securities from T+2 to a one-day settlement cycle, commonly known as T+1, which has taken effect in the US, Canada, and Mexico on May 28.

“This move towards shorter settlement cycles aims to reduce counterparty risk and increase market efficiency, and it is interesting to see what impact it will have on foreign exchange”, Carolina Trujillo Escudero says.

The move from T+2 to T+1 requires FX and asset managers to adapt their operational processes to accommodate faster settlement times. While the transition may initially pose challenges in terms of operational adjustments and liquidity management, it could ultimately benefit market participants by enhancing market stability and reducing settlement risk.

Another trend – which might not be as obvious in the FX market – is the transformation of multi-bank portals.

“There are different types of platforms for managing liquidity. However, due to different regulations in the EU, the UK, or the US regions, platforms need to function in slightly different ways in order to fulfil the regulations and the constraints therein.”

These portals offer access to European Multilateral Trading Facilities (MTFs), UK MTFs, OTC (Over-the-Counter) markets, and non-regulated pools.

“The fact that the platforms have to adapt to the different regions regulations risks fragmenting the market, says Trujillo Escudero. And with fragmentation, there is a risk of different pricing between the different sub-sets, which is not optimal.”

Another trend is that the platforms are finding new business models and are also entering partnerships with different players to find new revenue sources.

“Not only is the market more fragmented due to regulations, but the platforms are also offering new services through partnerships with different players. This is changing the landscape of our industry. Instead of only managing currency trading, they are now managing different tools and services such as data analytics, pre-trade TCA, client onboarding, and adding single bank information to their portals.

With that change, some platforms are trying to become the single point of entry, a “one-stop shop” for customers.

According to Trujillo Escudero, another trend is the increased collaboration among market participants.

“Instead of all players spending a lot of resources on developing new tools, those who end up spending, for example, five years on a new service can both take advantage of it themselves as well as capitalise on their investment by offering software as a service.

This collaborative approach not only fosters innovation but also creates new revenue streams for market participants, which is great since FX is an extremely demanding area regarding tech and quant resources.”

Last year, SEB was awarded leading FX bank in the Nordics by the Prospera survey. What do you think lies behind the award?

“Our relationship with our customers is our number one priority. Always. And we know that building rewarding relationships is a marathon, not a sprint, and it is a team effort. Together, we ensure that our customers always have world-class, smooth, 24/5 service across the full value chain globally, from advisory to pricing, research and strategy, operations and technological capability. We also ensure that they have what they need – both today and tomorrow, which is why we spend a lot of time building relationships with our clients and with other players in the FX world. It’s important to stay tuned in, but also to know when to do your own thing and when to collaborate with others.”