How does CLSSettlement work to mitigate settlement risk?
Settlement risk is the risk that one party delivers the currency it sold but does not receive the currency it bought from its counterparty, resulting in a loss of principal. Because many currencies are paid at different times of day, there could be a significant timing gap between the payment of one currency and receipt of the counter-currency, exposing counterparties to settlement risk. CLSSettlement, a payment-versus-payment (PvP) system, mitigates this risk by simultaneously settling payment instructions relating to FX trades by ensuring the final transfer of a payment in one currency occurs only if the final transfer of a payment in the counter currency also occurs.
Each day, CLS settles over USD6.6 trillion of payments in 18 of the most actively traded currencies globally, protecting over 70 settlement members, which include the world’s leading financial institutions, and over 35,000 third-party participants from the most significant risk in the FX market – settlement risk.
CLSSettlement by the numbers
In what ways does CLSSettlement deliver efficiencies and savings for CLS settlement members and their clients?
CLS delivers huge efficiencies and savings for CLS settlement members and their clients. The service calculates the net funding required for each settlement member on a multilateral netted basis, reducing the cash required to settle trades by up to 96%.
Settlement members only need to transfer the net amount of their combined payment obligations in each currency while the system settles the gross value of the transactions. Consequently, for every USD100 million settled, participants only have to fund USD4 million.
Additionally, CLS offers a liquidity management tool to our settlement members – in/out swaps. This service, combined with multilateral netting, results in an average funding requirement of less than 1% of the total value of all trades for participating settlement members – delivering best-in-class liquidity management.
On 20 June 2024, CLS achieved a record settlement day, settling USD19.1 trillion of FX payment instructions. The total funding required for settlement was just USD72 billion, or 0.38% of the gross value settled – meaning that for every USD100 million payment settled, each CLS settlement member only needed to fund USD380k.
What additional factors have been increasing CLSSettlement volumes and values?
Increased focus on FX settlement risk by policy makers and greater attention from investors on best practices in risk management has driven buy-side interest in CLSSettlement.
The Global FX Committee’s FX Global Code on the management of settlement risk, emphasizes using PvP mechanisms where available and recommends bilateral netting where PvP settlement is not available. The FX Global Code, coupled with the FSB’s G20 Roadmap for Enhancing Cross-Border Payments and the CPMI’s efforts to promote PvP adoption, underscore the importance of mitigating settlement risk for FX market participants.
Accessing CLSSettlement via CLS’s third-party service providers, investment managers benefit from settlement risk mitigation and operational efficiencies, allowing them to demonstrate best practices in operations and risk management to investors.
The trend towards foreign investments and hedging within portfolios has also contributed to increased adoption as investment managers seek to manage their FX exposures more effectively. Almost 80% of top tier investment managers are settling through CLSSettlement via their custodian banks1.
Please tell us a little about CLSNet and the service it provides.
CLSNet is an automated bilateral payment netting calculation service for foreign exchange trades. As a centralized platform, CLSNet enhances the FX netting process, delivering operational risk mitigation by standardizing and automating the net calculation process.
Banks, funds, corporates and non-bank financial institutions can all benefit from streamlining their post-trade matching and netting processes to mitigate operational risk in over 120 currencies, including for same day and non-deliverable forward transactions.
How does CLSNet enable a wider group of market participants to benefit directly from the operational cost reduction and risk mitigation that it delivers?
CLSNet offers direct access to a wide range of market participants including banks, funds, corporates and non-bank financial institutions, expanding the benefits of operational cost reduction and risk mitigation. By automating the netting calculation process and ensuring only confirmed trades are included in the net calculations, CLSNet eliminates manual intervention and enhances operational efficiency.
How much has CLSNet grown recently, and what has caused this?
CLSNet has been experiencing significant market adoption. Eight of the top ten global banks now benefit from the service, and the average daily netted value has now grown to over USD120 billion over the last 12 months. Growth is driven by the operational efficiencies and risk mitigation the service delivers and is underpinned by the broader public policy focus on reducing FX settlement risk, particularly in emerging market currencies.
On 20 June 2024, CLSNet had a record daily netted value of USD593 billion, reflecting the more recent growth in the service and its continually expanding network effect.
CLSNet by the numbers
1. Excluding Chinese based Investment managers