FX settlement system CLS has responded to its member board's request to investigate the feasibility of adding a matching and netting facility for non-eligible currencies (NECs) and the settlement of FX option premiums, non-deliverable forwards (NDFs), interest rate swaps and credit derivatives. CLS Bank Settlement Members have been meeting with CLS to thrash out the design and the attractiveness of the inclusion of these more complicated FX-related products. While use of FX derivatives has grown, some banks have voiced concerns that the pace of growth is stretching their back offices. "FX players are now being squeezed between the conflicting forces of growth and the need to tidy up their operations," says Jonathan Butterfield, executive vice-president at CLS. "The optimal way to do this is to establish a level of standardization and use of common infrastructures collectively."
Mounting pressure from imminent regulatory initiatives such as Basel II has meant that banks now have to invest in more robust risk management frameworks. One of Basel II's key requirements is for adequate capital to be set against certain trading-related activities. "Our primary goal has always been to reduce settlement risk, but to some degree this is now mutating into also reducing operational risk," says Butterfield.