CLS settles over $6.5 trillion of payment instructions daily across 18 currencies, protecting more than 70 settlement members and over 35,000 third-party participants from FX settlement risk. It does this by simultaneously settling payments relating to FX trades using its payment-versus-payment (PvP) system.
Mitigating FX settlement risk continues to be an area of focus for policymakers and regulators. They have been looking at how PvP settlement can be achieved for currencies where it is not currently available, predominantly in emerging markets.
“To better understand settlement risk, we – in collaboration with a number of our members – analysed an entire month of trading activity to determine how it was settled, to provide a good indication of market management of settlement risk,” explains Keith Tippell, chief product officer at CLS.
The analysis showed that of settlement-eligible transactions, on average 51% of the traded notional is settled through CLS. Much of the remainder relates to inter-branch and inter-affiliate trades (35%) and trades where either settlement occurs via a single currency cash flow or over accounts within the banks’ direct control (8%).
This leaves around 6% of trades exposed to FX settlement risk that could be settled via PvP in CLS's proprietary CLSSettlement. To address this remaining risk – as well as the risk related to emerging-market currencies – CLS is focusing its efforts on increasing adoption of CLSSettlement and on developing CLSNet, an automated bilateral payment netting calculation service for over 120 currencies.
CLSNet supports netting to reduce the payment obligations exposed to settlement risk while improving operational and liquidity efficiencies. CLS has seen an exponential increase in the trade flows processed by the platform over the last year.
CLS holds a position that enables it to collaborate widely across the FX industry, leading to the development of standardized solutions that enhance operations for all market participants.
“We are not only providing settlement-risk solutions to the FX market, we are also a driver of growth,” says Lisa Danino-Lewis, chief growth officer. “In 2001, the year before CLS’s launch, daily FX turnover was $1.2 trillion – now it sits at $7.5 trillion. The significant operational and liquidity efficiencies delivered by CLS have played a role in this increase.”