CLS Bank: CLS passes the Lehman test
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CLS Bank: CLS passes the Lehman test

Despite initial fears, the foreign exchange market appears to have handled Lehman Brothers’ collapse into Chapter 11 bankruptcy protection remarkably well. According to Rob Close, chief executive of CLS Bank, which settles the bulk of the market’s transactions, few deals that had Lehman as a counterparty were rescinded.

"A small percentage of trades were rescinded and that largely depended on what individual arrangements institutions had within their Isda agreements," Close says. "The vast majority of Lehman trades were processed smoothly and some of these were for very large amounts. Citi was the entity that authorized Lehman’s instructions and it can’t have been an easy decision for it to make, but it stood behind the deals and they went through. CLS worked exactly as it should do. It took settlement risk out of the market. CLS users knew they could leave their trades in it."

Andy Brown, global head of FX at HSBC, agrees that CLS did what it was designed to do. "I think it worked very well," he says. "People are starting to worry more than ever about credit and settlement risk. While CLS doesn’t remove settlement risk completely, it does to a significant degree. It’s a testament to the market’s participants as well that all the trades supposed to go through did. A lot of credit must also go to Citi for successfully getting so many Lehman trades settled."

Not only did CLS ensure the relatively smooth closure of Lehman’s transactions, it did this during a week when it set a new record for the amount and value of business it settled.

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