Over the past 20 years CLS has delivered an exemplary level of service and resilience in carrying out its primary role of mitigating settlement risk in FX. What accounts for that success and what impact has it had on helping to shape the market today?
Our unique position at the center of the FX market is a key driver of our success, as it enables industry-wide collaboration to develop standardized solutions to address industry challenges. Further, as a financial market infrastructure developed via a public-private partnership, we collaborate with the market to solve industry challenges, resulting in strong industry support for our initiatives. This level of collaboration wouldn’t be possible without the support and commitment of our shareholders and members, who place their trust in us every day to deliver an exemplary service to the industry.
We have also continued to invest in our products, risk management and controls and underlying technology. As part of this approach, we have conducted a multi-year technology investment program to make the technology platform underpinning CLSSettlement one of the most sophisticated, resilient, scalable and flexible across global financial market infrastructures.
We attribute the success of CLSSettlement to both unrivalled levels of settlement risk mitigation and the real liquidity benefits the service delivers through multilateral netting. This process significantly reduces the cash required to settle the payments of trades, making up to 96% of cash flow available for other business operations. We also offer a liquidity management tool to settlement members – In/Out Swaps – which, combined with multilateral netting, results in an average funding requirement of less than 1% of the total value of all trades.
Please share your latest headline numbers in terms of CLS currency coverage membership and settlement figures.
Settlement risk continues to be an area of discussion among FX market participants. There is growing concern by policy makers and market participants that settlement risk is on the rise – in particular as a consequence of growth in emerging markets currencies. However, the overall amount of settlement risk we mitigate continues to grow year-on-year.
In the last three years, the average daily values settled in CLSSettlement has grown by 11%, with record average daily settlement values of over USD6.5 trillion in H1 2022, evidencing our growing market share in CLSSettlement-eligible currencies.
Further, on 15 December 2021, we settled a record USD15.4 trillion of FX payment instructions in a single day. Thanks to multilateral netting, the total funding required to settle this amount was just USD72 billion (0.5% net funding requirement of the total value settled). This efficiency is only possible due to the unique size, depth and global scale of our network and reach across the FX ecosystem.
Recent growth also includes increased uptake of CLSSettlement across the buy-side community. Last year saw a 25% increase in the number of third parties using CLSSettlement and nearly 10% growth in third-party settled values.
CLSNet, our automated bilateral netting calculation solution, is also experiencing considerable momentum, with 179% year-on-year growth in the average daily notional of net calculations in H1 2022. This demonstrates the fundamental value this service is providing to market participants.
What were some of the key milestones for CLS as the FX market dealt with structural change, regulatory reform and the arrival of new technologies over the years?
CLS is proud to have successfully supported the industry in maintaining financial stability during periods of extreme stress. CLSSettlement operated seamlessly through the financial crisis of 2008 and, most recently, during the extreme volatility in 2019-2020 resulting from the Covid-19 pandemic. This seamless provision of services is testament to the organization’s high levels of operational resilience thanks to ongoing investment in technology and best practice risk management processes.
Our main objective is the mitigation of FX settlement risk. We have continued to drive the debate and educate market participants on this topic amid growing concern from industry participants that FX settlement risk is increasing. Even though settlement volumes have increased for CLSSettlement-eligible currencies, the proportion of FX transactions not settled on a payment-versus-payment (PvP) basis has risen due to increased trading in some key emerging market currencies.
This has heightened the focus on overall risk management in cross-border payments, with both public sector and market participants calling for greater adoption of PvP mechanisms to mitigate rising settlement risk. For example, the Financial Stability Board (FSB) published the G20 Roadmap for Enhancing Cross-Border Payments in 2020, of which building block 9 recommends mitigating settlement risk for cross-border payments via increased adoption of PvP1.
In addition, the Global Foreign Exchange Committee called on the industry to adopt PvP more widely in its three-year review of the FX Global Code, a set of global principles of good practice for the FX market2. The updated FX Global Code includes amendments to the key settlement risk principles – Principles 35 and 50 – encouraging FX market participants to explore ways to further mitigate risk and reduce operational costs by adopting a best practice approach to FX settlement risk management and netting. We continue to support the industry in adhering to these principles via CLSSettlement for PvP settlement and CLSNet to facilitate bilateral netting.
In what ways has CLS been able to leverage its central position in the global FX market to help participants address other post-trade challenges?
Our unique position means that there is ongoing dialog with our settlement members, ensuring that the organization can respond effectively and efficiently to their needs. We have also continued to invest in our infrastructure. In 2021 we completed part of our multi-year technology investment program with the successful migration of CLSSettlement onto our Unified Services Platform, thereby optimizing the underlying technology platform supporting our settlement services and affording us the flexibility to evolve our PvP offering more easily.
CLSNow is a bilateral PvP gross settlement service offering same day settlement in CAD, CHF, EUR, GBP and USD. The service was introduced in response to the need of treasurers to optimize liquidity in the same day market while mitigating risk.
Our settlement members can also submit cross-currency swaps (CCS) to CLSSettlement. CCS typically have significant settlement risk exposure due to the high value of the initial and final principal exchanges. By using CLSSettlement, participants can mitigate settlement risk while benefitting from a reduction in daily funding requirements.
Our relationship with settlement members offering third-party services keeps us connected to the needs of the buy side. With this community in mind, we launched CLSTradeMonitor, a post-trade monitoring and reporting tool that provides a single view of all trade instructions submitted to CLSSettlement and CLSNet regardless of the CLSSettlement provider. It provides the buy side with enhanced transparency and a reliable mechanism to reduce operational risk.
We have also leveraged our position at the center of the FX industry to enhance transparency through CLSMarketData, a truly unique source of high-quality transaction data. Since our launch in 2002, we have warehoused information about every trade, with CLS datasets now including aggregated data on over 3 billion trades from the last 20 years. This gives participants access to the largest single source of FX executed trade volume data available to the market.
Where are you focusing your efforts for continuing to grow CLS’s community of users?
We have been focused on growing the buy-side community through CLSSettlement and CLSNet. Now, more than 30,000 third-party participants around the world access CLSSettlement indirectly through settlement members.
For CLSNet, our automated bilateral netting calculation solution that can be directly accessed by both the sell and buy sides, we remain focused on developing partnerships that can help grow the client community. As more financial institutions join the service, we are expecting to see continued growth over the coming years.
What immediate plans does CLS have to further expand its settlement, processing and data solutions for the FX industry?
We expect to see continued growth in CLSSettlement, particularly among the buy-side community. We also anticipate an uptick in volumes in certain product areas, such as the continued growth in CCS submitted to CLSSettlement, which experienced a 27% year-on-year increase in Q2 2022. The continued growth in our settlement services demonstrates industry commitment to the FX Global Code’s settlement risk principles, including greater emphasis on the use of PvP mechanisms where available.
In the medium term, we have made a strategic decision to allocate further resources to deliver enhancements to CLSNet, which provides risk mitigation for currency flows outside CLSSettlement and supports Principles 35 and 50 of the FX Global Code.
Over the next few years what do you see as the main challenges facing the FX market, and how will CLS be looking to meet these?
There is a need to address rising settlement risk that is recognized by both the public and private sectors. We have been working with our settlement members to find a solution, such as an alternative PvP mechanism.
As with all industry-wide initiatives, and just like the original development of CLSSettlement, any alternative PvP solution will take time to develop and implement. For any solution to be successful, we must consider alignment and adherence to relevant policies and regulations, legal frameworks and local market practices.
Therefore, in the medium term we will focus on increasing adoption of CLSSettlement and further expanding CLSNet’s features and client base. This will ensure market participants benefit from enhanced risk mitigation, operational efficiency and liquidity while also aligning to best practices in the FX Global Code.