US funds’ FX forwards settlement dates show clustering effects

Counterparty Radar: Analysis shows concentrations appear on certain dates, which can differ by currency

Data clusters

Foreign exchange forwards are one of the most common derivatives instruments used by US mutual funds. They tend to be rolled regularly, with tweaks to ensure the hedges are in line with the changing underlying exposures.

But according to analysis of US mutual fund and exchange-traded fund filings conducted by FX Markets, these trades tended to settle only on a handful of dates, often clustering around quarter-end – though not all currency pairs exhibited the same trends. 

The analysis is based on thousands of filings to the US Securities and Exchange Commission (SEC) that offer a snapshot of positioning for each quarter, and form the basis of a forthcoming tool that will allow readers to analyse counterparty data (see box: About this data). 

Although the filings do not reveal when a trade was executed, it is possible to see when trades settle and potentially roll. Timing of rolls can be important – for instance, during the Covid-19 market turbulence last year, some asset managers rolled their forwards earlier to avoid quarter-end liquidity issues. 

 

 

Figure 1 shows the proportion of a quarter’s volume settled on a given date. The end of a fund’s fiscal quarter does not necessarily align with a calendar quarter, but in some cases trades clustered at the start of each calendar quarter.

  • In Q2 2020 filings, for instance, 36% of volume settled on just three dates, with 11% settling at the start of Q3 on July 2.
  • Trades on funds’ books consistently saw settlement clusters a month into each quarter – 18% of Q1 volume settled on February 4, 13% of Q2 filings settled on May 5, 26% of Q3 volumes settled on August 4 and 22% of Q4 volumes settled on November 3.
  • Tuesdays tended to be popular settlement dates in the second half of the year, with 33% of Q3 volumes and 38% of Q4 volumes settled on the second day of the week.
 

 

Looking at G10 pairs, the clustering is very similar to figure 1, given around three-quarters of total volume are in those currencies. The G10 volumes are dominated by EUR/USD and USD/JPY trades though, and specific pairs such as GBP/USD show some idiosyncrasies.

  • Figure 2 shows each quarter’s GBP/USD volumes tended to cluster around the start of the next calendar quarter.
  • Q1 and Q3 both saw more than 30% of volumes settle just after the respective quarter ends. Q2 and Q4 saw over a quarter of volume settle after the quarter end.
  • More than a third of Q3 and Q4 respective volumes settled on a Friday, and over a quarter of each period’s volumes settled on a Tuesday.
 

 

Figure 3 shows the same analysis for the USD/CHF pair, which differs a lot from its other G10 peers.

  • This pair has a wide distribution of settlement dates, where no settlement date saw more than 16% of a quarter’s total volume.
  • The 10 most common settlement dates for trades listed on all quarter filings accounted for 31% of the year’s total volume in the pair, below the average of 47% for the 10 most popular pairs by volume.
  • For Q4 trades, only one day saw more than 10% of USD/CHF volumes.
  • Settlement dates more often fell on a Wednesday, with the highest proportion of each quarter’s trades settling on the third day of the week. In Q4, 39% of volumes settled on a Wednesday.
 

 

Looking at emerging markets pairs such as USD/BRL shows different patterns yet again.

  • Trading in USD/BRL showed the most highly concentrated settlement dates of the 10 most listed pairs by volume. Figure 4 shows that each quarter saw more than 30% of volume settle on a single day, which was just after the previous quarter-end.
  • Ten dates accounted for 72% of all listed volume, compared with an average of 47% for the 10 most popular pairs by volume on funds’ books.

About this data

The information used in this analysis comes from Nport-P filings to the US Securities and Exchange Commission. This is a relatively new form, introduced at the end of 2019, which requires mutual funds and certain exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC. 

The filings include FX forward transactions that were live at the time of the filing, and state details such as bank counterparty names, currencies, trade sizes and settlement dates. The forms are filed to the SEC on a monthly basis, and the regulator makes the final filing of a given fund’s quarter public 60 days after the end of that period. The filings are in a structured XML format, making it possible to download and parse the data for trends. 

This analysis was based on tens of thousands of Nport-P filings made to the SEC in 2020. It’s important to caveat the information. While these are pro forma regulatory filings to the SEC and should be accurate, mistakes and miscategorisations do occur. The data was cleaned and obvious errors excluded. It was not possible to check every trade, and FX Markets takes no responsibility for filing errors. 

Information from the filings is used as the basis for a new tool, known as Counterparty Radar, which allows users to search the filings information themselves to discover the most popular dealers and most active managers for FX forwards and options. 

As this article went to press we spotted that a few hundred trades from Janus Henderson in Q1 and Q2 2020 had not been included in the dataset that fed into the above analysis. This is being rectified and the article will be updated as soon as possible to reflect this, but we expect that if any changes are required, they would be extremely minor.

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