CLS Investigates Extending PvP Reach

CLS says a working group of 12 settlement members with global operations is participating in a pilot to evaluate potential payment-versus-payment (PvP) solutions for currencies that are not currently eligible for CLS Settlement. The pilot, which started in June, is using trade data from each participating settlement member to better inform the overall design of the optimal solution.

“CLS is uniquely placed at the centre of the FX industry to work in partnership with the public and private sector to develop a PvP solution that will address settlement risk for currencies that are not currently eligible for CLS Settlement,” says Marc Bayle de Jessé, CEO of CLS. “CLS Net – our bilateral payment netting calculation service – is already open for approximately 120 currencies, reducing risk and delivering efficient, automated and standardised post-trade netting calculation and processing services for banks, asset managers and corporates across the globe.

“We are now working with the market to evolve the service to further mitigate settlement risk and unlock liquidity,” he continues. “The support we have received from our settlement members through their participation in the working group and pilot is a vote of confidence in CLS’s ability to solve this industry challenge by creating a PvP solution for currencies not supported by CLS Settlement.”

What is a timely move by CLS comes in response to growing regulatory concerns around co-called settlement “gaps” in the PvP landscape, specifically that trade volumes were growing in non-CLS supported currencies. This issue was first raised by the Bank for International Settlements in a study of its 2019 Triennial FX Turnover Survey and has since been taken up by the Global Foreign Exchange Committee.

“Developing an alternative PvP solution will take time and will require collaboration between the industry and policymakers, but we are confident that as an industry we can succeed,” says Russell Lascala, global head of foreign exchange at Deutsche Bank. “We welcome the opportunity to collaborate with CLS and other market participants to explore potential solutions to further mitigate risk in the FX market.”

Robert Kim, head of North America currencies, JP Morgan, adds, “CLS has identified that a rise in emerging market currency trading has led to an increase in settlement risk. Through our involvement in the working group, we are supporting efforts to address this issue by exploring the development of an alternative PvP solution. As the established and proven settlement provider in the FX market, we see CLS as uniquely positioned to tackle the issue of settlement risk.”

Recent public policy proposals acknowledging the need for greater PvP adoption include building block 9, “Facilitating increased adoption of PvP”, and related action items in the Financial Stability Board’s Cross Border Payments Roadmap. The Global Foreign Exchange Committee also recently published an updated version of the FX Global Code, which includes changes to the settlement risk principles, including greater emphasis on the use of PvP mechanisms where available. It also provides more detailed guidance on the management of settlement risk where PvP settlement is not used.

The work has attracted support from Bank of America, BNP Paribas, Citi, NatWest Markets and UBS. CLS established the working group in late 2020, it has also recently completed the latest stage in its multi-year technology investment programme to upgrade its infrastructure.