All of us active in the financial industry in September 2008 will remember vividly the enormous global challenges posed by the collapse of Lehman Brothers. As it happened, I was due to speak at Sibos in Vienna and arrived on Sunday morning, having agreed that key members of the management team would stay in London and New York, given the unfolding news. Like many others in the industry, CLS had to determine over that weekend how it might be impacted if and when Lehman Brothers went into bankruptcy.
Our concerns began with the fact that Lehman Brothers was a User member – a special category of membership that submits its instructions direct to CLS but relies on its Settlement member – Citi – to commit to settling the instructions each day. As it turned out, the Lehman entity using CLS did not go into liquidation until the end of the week, Citi authorised the settlement of the instructions each day and CLS settled Lehman Brothers’ and everyone else’s instructions – 4.4 million instructions that week, to a value of $26.3 trillion (half of the world’s GDP).
During that week, CLS worked exactly as designed, providing great certainty in uncertain times, eliminating settlement risk for the instructions inside CLS and coping with exceptional sustained volumes and values of FX trades that symbolised the frenetic nature of the market.
This single event was a defining moment for CLS in that it reminded everyone that counterparties can fail and settlement risk does exist. One German bank during that week chose to pay euros to Lehman Brothers outside of CLS and failed to receive dollars – costing it €300 million. For the CLS team, while it provided the most stringent and visible of tests, the collapse was an event that we had planned for since inception. Lehman Brothers served as the modern day version of the Herstatt failure, though far larger and more global in nature.
The financial crisis has certainly prompted a distinct shift in attitude, pushing settlement and operational risk management to the top of banking and regulatory agendas and driving a surge in participation in the CLS settlement service. Since Lehmans, third-party participation has increased from 3,600 to over 8,000. In fact, the feedback we get from our larger members is that if you’re not settling with CLS, then we’re not trading with you. Our most recent information indicates that the CLS service now settles in excess of 75% of all market trades.
The FX market has demonstrated, during Lehman’s week and over the years, that it is a highly efficient market, providing high degrees of automation and managing the number-one risk in FX – settlement risk – effectively. FX has evolved considerably over the last decade. Electronic trading has been eagerly adopted and platforms supporting different trading styles have proliferated. E-commerce investments by our members have also contributed to the growing adoption of electronic trading. These have brought unparalleled levels of price transparency and efficiency to participants. They have also fundamentally changed the operating dynamics of the market.
Over the last decade we have witnessed the true rise of FX as an asset class. It is the most global and liquid of the money markets and is recognised by a wider set of regulators as the most systemically important market because of its central role in the global economy. When CLS first launched, we planned for volumes of 45,000 per day. During the market volatility witnessed in May this year, we saw average volumes peak at over 1 million daily with an average daily value of $4.2 trillion. Since it went live, CLS has settled over 649 million payment instructions with a value of $5.1 quadrillion by the end of May 2010 – staggering numbers. This is a testament to the original design, the members’ and payment system operators’ daily activities and the CLS team that operate the service.
If there is one constant in FX trading it is that it is continually adapting and evolving and is often impatient. Working to develop collective solutions, given the intense competition between our owners, and then undertaking development, testing and launching has been something we have had to learn to drive rather than take a backseat and wait for a consensus. I think there are several significant areas where a collective solution will be materially cheaper than every bank doing their own thing. Market data and connectivity for clearing spring to mind and are high on our agenda.
I have met and worked with many talented and committed individuals from around the world. The global nature of our business, shareholders and regulators has added a unique and rewarding dimension to the job. I am particularly proud of how we have expanded our currency base and participation and delivered the CLS aggregation service in early 2010, which will add considerable value to the industry. Equally we have kept our eye on the number-one daily priority of delivering the service to the required standard.
I have greatly enjoyed my time at CLS, first as COO and then as CEO, and have to admit to a small element of regret that it has ended as there is still so much more opportunity for CLS to add value to the industry. I am now passing the baton to my successor, Alan Bozian. I am sure the company’s future is in good hands for an exciting future.
ABOUT ROB CLOSE
Prior to joining CLS, Rob Close was Group Payments Strategy Director at Barclays Bank, responsible for such activities as the Group Euro Programme, Electronic Trust infrastructure, Securities Settlement and Payments Industry Management. The latter involved directorships with SWIFT SC (Brussels), Identrus (New York), BACS (as Deputy Chairman) and CHAPS (as Deputy Chairman).
Rob's 29 years with Barclays included senior roles as Managing Director of Barclays Global Payments, Head of Money Transmission, Deputy Head of Electronic Banking, Deputy Head of Personal Sector Marketing and Assistant Treasurer.
Rob holds a BA and MSc in Economics and is an Associate of the Chartered Institute of Bankers. He was awarded the OBE for services relating to the Euro but we don’t hold that against him.
We’re sure that all of the many people in the FX market who know Rob will join us in wishing him a happy, healthy, prosperous and well-earned retirement.