FX: CLS and Traiana extend aggregation service to four EM currencies

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By:
Solomon Teague
Published on:

The past few years have seen CLS beef up its offerings in operational risk management well beyond its core settlement business, with services such as netting and compression; the expansion of its aggregation service to emerging market (EM) FX is the latest string to its bow.




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CLS Group, the trade settlement utility for the FX market, and Traiana, part of the NEX Group, have expanded CLS Aggregation Services (CLSAS) – a joint venture between the two companies – to support the aggregation of currencies not supported by CLS.

The service aggregates large numbers of low-value spot FX trades into a single, larger trade to improve operational efficiency and resolve capacity challenges for the large banks that CLS counts as members.

It now handles offshore renminbi, Russian rouble, Turkish lira and Polish zloty trades against the US dollar and euro, alongside the other currencies settled on CLS.

Banks have seen the number of trades they handle increase rapidly with the proliferation of high-frequency trading (HFT), especially among banks offering prime brokerage services to HFT hedge funds. This has created a back-office challenge, as banks attempt to process the paperwork associated with these increasing flows.

By bundling matched FX trades to a single trade, CLSAS reduces the amount of back-office work needed to settle them. It mitigates operational risk by reducing the number of failed trades and enhances capacity for the banks’ middle- and back-office systems, which is especially beneficial for participants on peak volume days, the providers say.

Regulation

The European Securities and Markets Authority’s Markets in Financial Instruments Regulation allows institutions to defer publication of the details of trades in FX and other asset classes with trade aggregation.

“Where several transactions are published in such an aggregated form, this report should not include a transaction identification code,” it says.

However, this is because such reports are “only meant to provide temporary information pending the publication of the full details of the transactions on an individual basis. Those subsequent single-transaction reports should incorporate a trade ID as required for all other transactions”.

This suggests trade aggregation only defers the back-office workload for banks, as all trades do need to be accounted for individually in due course.

Nonetheless, this remains an attractive proposition for CLS member banks that use the aggregation service and requested CLSAS to extend its service to these four EM currencies specifically. CLSAS has no plans to extend the service further, but admits more EM currencies could be added later if there is sufficient demand.

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Basu Choudhury,
Traiana

Basu Choudhury, head of business intelligence at Traiana, says: “Failure rates are higher for bilateral settlement. More importantly, when currencies settle in CLS, firms are able to increase their trading exposure.

“For non-CLS currencies, no such mechanism exists. This aggregation service extends that capability to these four EM currencies.”

CLSAS says the aggregation process is itself risk free. The group holds the trades while they are being bundled until a triggering event, which could be the accumulation of 1,000 component trades, the sum of aggregated trades exceeding a defined threshold of $100 million, or a time limit of two hours being reached.

Once one of those triggering events occurs, a single, larger trade is executed and settled on CLS. Counterparties have access to all information pertaining to the trade before it is executed as part of a larger trade and the terms of the trade remain unchanged.

It is too early to quantify the impact this aggregation will have in terms of efficiency savings at this stage, but CLSAS is hopeful the gains will be significant, and compare favourably with those banks that enjoy using the service with G10 currencies.

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Adam Levine, CLS

Adam Levine, head of product management at CLS, says: “CLSAS typically handles hundreds of thousands of trades per day with an average aggregation rate of around 95%. This means that for every 100 trades executed, around five or six larger trades will be processed by a bank’s middle and/or back office, though there is some small variation depending on the currency pair. 

“There is no reason to believe things will be any different for the new EM currencies once the service is established.”

Banks have started using the service and thousands of trades have already been aggregated, though it will take time before enough trades have been aggregated in these currencies to quantify the efficiency savings.