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Foreign Exchange

CLS grapples with emerging market settlement challenge

The FX settlement provider has recognised that risks are higher for currencies outside its scope; finding a solution, particularly one that includes the renminbi, could be tough.

CLS Group, the US-based FX settlement provider, is working with the industry and regulators to develop a solution to the decline in the proportion of trades executed with payment-versus-payment (PvP) protection.

The fall in such transactions had been highlighted in the Bank for International Settlements’ December 2019 triennial survey.

marc-bayle-de-jesse_cls-400.jpg
Marc Bayle de Jessé, CLS

Noting that trades in which a non-CLS currency is on at least one side of the trade have risen by more than a third in the three years since the 2016 BIS triennial survey, CLS chief executive officer Marc Bayle de Jessé told Euromoney that growth in settlement risk in non-CLS-eligible currencies could increase settlement risk.

CLS is looking at possible solutions to the problem, including adjusting the current model to provide an alternative form of PvP protection to that which is applied in CLS settlement.

Ken Monahan, senior analyst at Greenwich Associates, reckons CLS has a use outside the remit of Basel III or in places where the credit rating of the bank is subordinate to the credit rating of the sovereign.

“Extending it to emerging markets (EMs) to eliminate the potential for systemic risk within these countries makes sense,” he adds.

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