Traders of cleared foreign exchange products are about to get a new service designed for clearing and settlement.
CLS, a provider of settlement services for the global foreign exchange (FX) market, along with LCH.Clearnet, a multi-asset clearing house, are developing this new clearance and settlement process.
The new service is consistent with goals set out by the G20 to promote clearing of standardized derivatives. It will be open to all central counterparties (CCPs) and apply to a range of cleared FX products, including OTC and exchange-traded FX options, FX futures and cross-currency swaps. The service will provide a specialized payment-versus-payment (PvP) settlement in all CLS-eligible currencies and will operate separately from CLS’s main PvP settlement service. CLS settles an average of USD5 trillion a day for the world’s largest financial institutions.
“We have been working with the CCP community and other industry stakeholders to design and model the most effective way to mitigate settlement risk for cleared FX products,” said CLS chief executive David Puth. “Settlement risk is one of the most significant risks in FX. Our priority is to mitigate this risk, while increasing operational efficiency through our technology and connectivity.”
The service will deliver a number of risk benefits to industry participants. In the event of a clearing member failure, payment netting will substantially reduce the size of the participating CCP’s potential liquidity shortfall, mitigating systemic liquidity disruption. The service is designed to work on an all-or-nothing settlement basis, which minimizes the risk arising from partial or incomplete settlement. CCPs using the service also will benefit from CLS’s expertise in monitoring and processing payment activity.
CLS aims to launch the new service in 2016, subject to regulatory approval.