CLS Welcomes FSB Report: Warns of Obstacles to Progress

CLS has welcomed the latest progress report from the Financial Stability Board (FSB) on the G20 plan to enhance cross-border payments, but warns of obstacles to some of the ambitions laid out in the roadmap.

The report, which for the first time includes KPIs (key performance indicators) to help assess progress, acknowledges the benefits of PvP (payment-vs-payment) mechanisms in the FX market but reiterates previous warnings that certain segments are lagging behind, namely emerging markets.

Settlement risk in FX markets has taken on a much bigger dimension since the Bank for International Settlements first flagged the issue in its 2019 Triennial Survey of Foreign Exchange Turnover, since then multiple central banks and market bodies have sought to address the issue. The primary concern has been around the growth in emerging markets currency trading, especially in Chinese renmimbi, which currently sit outside the CLS mechanism.

Other mechanisms, such as Baton Systems, are rolling out solutions seeking to address the issue, however it remains early days in terms of broader adoption. The push for accelerated and more automated settlement has been boosted by the planned move in the US, to bring securities settlement into a T+1 environment, in contrast to T+2 which continues to operate throughout much of the globe.

CLS says it has been exploring several ways to expand PvP coverage, including an alternative PvP service for EM currencies. It warns, however, that, “…progress in this area must overcome regulatory and geopolitical challenges, and it will require public and private sector stakeholders to closely collaborate over multiple years to arrive at an industry solution”.

For now, CLS says it continues to focus on growing CLSNet, its standardised, automated bilateral payment netting calculation service for over 120 currencies, which helps to address some of the settlement and operational risks associated with emerging market currencies.