As well as having to cope with the increase in absolute volumes, banks have also had to try to cope with the emergence of a new breed of market participants that deal in smaller sizes more frequently than their clients did in the past. The scale of the problem was highlighted in a report from market intelligence firm McLagan (Z/Yen) published in December 2008; this stated that the average daily volume of tickets processed by one big FX player had increased from 6,500 in 2001 to an expected 200,000 in 2008.
For some, an obvious solution has been to net deals between counterparties. However, an impediment to any such initiative, at least between interbank counterparties, is that CLS, the industry-owned utility, only accepts trades on a gross basis. According to the Bank for International Settlements, CLS settled 55% of FX businesses in 2006.
There have been implications in some quarters that CLS has been intransigent in its refusal to accept netted trades for settlement and that it has effectively imposed a tax on the industry. However, the reality is that CLS, which was effectively established at the explicit behest of the G10 central banks as a way of removing Herstatt (settlement) risk from FX, has to cover its fixed costs, and the acceptance of netting would challenge its ability to do this.