CLS, a financial market infrastructure service offering settlement, processing and data solutions across the international foreign exchange (FX) ecosystem, has welcomed updates to the FX Global Code – which aim to place more emphasis on the use of payment-versus-payment (PvP) settlement mechanisms where accessible, while offering thorough guidance on the management of settlement risk where PvP settlement isn’t being used.
The key changes to the Code in relation to the mitigation of FX settlement risk and best practice in post-trade processing include:
- Principle 35: solidifying the importance of PvP settlement to address settlement risk where it is possible, and the use of automated settlement netting systems where it’s not.
- Principle 50: more extensive guidance on the measurement, monitoring and control of settlement risk where PvP settlement isn’t accessible, with an increased focus on the confirmation process of bilateral netting and the agreement of predetermined cut-off points.
CLSSettlement, a major multicurrency settlement solution, aims to support industry participants with following Principle 35 of the latest Code as it uses a PvP system, reducing settlement risk by settling the payment instructions relating to underlying FX transactions in a simultaneous manner.
Currently, the service settles more than $5.5 trillion of payments in 18 of the world’s most frequently traded currencies, for over 70 direct participants and 25,000+ indirect participants.
CLSNet is described as a standardized, automated bilateral netting service for FX trades that are completed outside the CLSSettlement service in around 120 different currencies. It supports Principle 35 and Principle 50 of the Code.
Trades sent over to CLSNet get validated and paired up to the predetermined cut-off times between counterparties for all currencies. This process aims to ensure that only confirmed trades are being added to the automated net calculation and there’s a common record of the outstanding payment obligations.
By automating the netting process through a centralized infrastructure, system users are able to take advantage of improved operational efficiency as well as increased risk mitigation for currencies that are unable to settle in CLSSettlement.
Marc Bayle de Jessé, CEO at CLS, stated:
“We fully support the changes to the Code as it will encourage FX market participants to explore ways to mitigate risk further and reduce operational costs by adopting a best practice approach to FX settlement risk management and netting.”
Marc added:
“In support of these changes to the Code, and in order to make access to PvP settlement mechanisms more widely available, we are working with the market to evaluate potential PvP solutions for currencies that are currently unable to settle in CLSSettlement. In late 2020, we established an industry working group and are actively exploring opportunities with the market to mitigate settlement risk further and unlock liquidity.”
Marc further noted that they are analyzing trade data from their settlement members in order to contribute to the design of new solutions while furthering the sector’s understanding of market participants’ settlement practices. Marc added that they now look forward to updating the GFXC and its members on these initiatives.