CLS: mitigating settlement risk is crucial as volatility rises in 2019

Geopolitical factors expected to drive markets this year

Dino Kos: geopolitical events, a slowdown in major economies and divergent G10 monetary policies will drive markets

As the UK’s departure from the European Union approaches the March 29 end date, market participants need to prepare for bouts of volatility and put appropriate risk management tools or solutions in place to navigate volatile markets safely, cautions Dino Kos, chief regulatory officer at CLS.

Foreign exchange settlement facility CLS sees geopolitical events such as Brexit, as well as the slowdown in the major economies and divergent monetary policies among G10 currencies, driving markets in 2019.  

Kos says these events bring into focus the risks associated with settlement outside of CLS’s main service, CLSSettlement, its payment-versus-payment system for 18 of the world’s most traded currencies.

To further reduce currency risk, CLS launched CLSNet in 2018, an automated bilateral payments-netting service, which operates on distributed ledger technology. It allows market participants to benefit from payments netting in 120 currencies not eligible for CLSSettlement. CLS is already planning to enhance CLSNet.

“Additional enhancements will likely include a ‘matching without netting’ and a ‘netting without matching’ service,” says Kos. “We are also considering the scope for additional functionality to include delivery of payment instructions (but not actual settlement) and additional asset classes.”

The firm says it is also planning to roll out its CLSNow service this year. The same-day gross payment-versus-payment service mitigates settlement risk in the same-day market. In addition to operational efficiencies and risk mitigation, Kos says the new service will provide new tools to manage cross-border and cross-currency liquidity needs.

Additional enhancements will likely include a ‘matching without netting’ and a ‘netting without matching’ service
Dino Kos, CLS

“To the extent [that] it helps banks better manage intra-day liquidity, it will also help them ensure compliance with a number of regulations, including those of the Basel Committee and best practices in the FX Global Code,” he says.

CLS expects adoption of the FX Global Code of Conduct to make further inroads in 2019, as market participants continue to embed the principles into many aspects of their trading practices.

“Continued adoption of the Code is key to its success and will ultimately create a more transparent market. This will support market growth as a wider number of market participants should have greater confidence that the industry is upholding the highest ethical standards and practices,” concludes Kos.

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