e-Forex-May-23

RISK MANAGEMENT
extended effort that is subject to
several requirements, including
ongoing support from the central
banks on both sides of the currency
flow, and in some cases changes
in the target jurisdiction’s laws and
regulations.
Given these complexities, we are
exploring several avenues to expand
PvP coverage. For now, we are focusing
on growing CLSNet, our automated
bilateral payment netting calculation
service for over 120 currencies to
increase efficiencies for EM currencies
and help mitigate the risks that can
be addressed now. CLSNet may also
potentially form the foundation on
which subsequent potential new
settlement services could operate.
What solution can CLS offer
market participants now for
addressing rising settlement risk
in emerging market currencies?
CLSNet already helps to mitigate
risk associated with trading EM
currencies. It supports netting to
reduce the payment obligations
exposed to settlement risk while
improving operational and liquidity
efficiencies. Crucially, most of the
interbank transaction flow through
CLSNet is in the deliverable EM
currencies that pose the most
settlement risk for CLS’s settlement
members.
Over the past year, the service has
seen a substantial rise in adoption,
with the average daily value of net
calculations increasing 328% year-onyear
during 2022. On 15 March 2023,
we witnessed a record daily notional
of USD274 billion in net calculations.
The growing CLSNet community
includes eight of the top ten global
banks; latest additions include First
Abu Dhabi Bank and UBS, and current
onboardings include Deutsche Bank
and MUFG Bank.
Successful settlement risk mitigation
has been largely achieved for CLSeligible
currencies via CLSSettlement.
But with the growth in EM currency
trading, the remaining challenge
is how to mitigate settlement risk
for currencies ineligible for PvP
settlement.
For these currencies, mitigating
operational risk, optimizing liquidity
and creating operational efficiencies
through a centralized, standardized
and automated process, like CLSNet,
is the industry’s preferred approach
until a robust alternative PvP solution
can be developed.
How is CLS helping the industry
through other significant
developments?
As the financial market infrastructure
in the FX market, we are ideally
placed to help market participants
solve industry challenges. One of
the most recent examples of this
is the work we are doing with our
settlement members and central
counterparties to explore how we can
support them in optimizing capital
as part of the industry transition
to the standardized approach for
counterparty credit risk (SA-CCR).
Irrespective of whether our settlement
members opt for the creation of
bilateral overlay trades to flatten their
currency deltas, as is currently the
case, or opt in the future to centrally
clear certain tranches of outright FX
trades (such as forwards or swaps),
we will play a key role in supporting
members as the FX ecosystem
evolves.
Our primary focus is to ensure that FX
flows are optimally and safely settled,
regardless of which method of capital
optimization market participants
choose. This is an ongoing dialog with
the industry that will continue for the
next couple years.
Underpinning all our work at CLS
is a best-in-class resilience and
operational posture to enable us to
deliver optimal solutions to public
policy and industry challenges. As
the critical service provider to the FX
market, we require resilience above
all else – across our infrastructure,
controls and cybersecurity.
We have invested in the technology
underpinning our services and now
have one of the most sophisticated,
resilient, scalable and flexible
post-trade technology platforms
across global FMIs. It enables us
to evolve our post-trade offerings
more easily to meet the needs of
the FX market, while ensuring we
continue to meet the highest levels of
operational resilience.
1
2022 Bank for International Settlements survey (BIS Survey); https://www.bis.org/statistics/rpfx22.htm
MAY 2023 e-FOREX 45