CLS Bank seeks to increase forex settlement membership

The operator of the largest foreign exchange settlement system is working on bringing the renminbi, rouble and clearing houses within its network, seeking to plug potential systemic risks emerging in the fast-growing forex market.

CLS Bank, overseen by 21 central banks, wants to broaden its membership over the next 18 months as global policy makers push to shore up markets.

The group has been designated by the US as systemically important since it offsets risk in the world's most liquid market. Most forex trades do not pass through a central risk management venue, like an exchange or a clearing house. Instead, CLS acts as a middleman to a trade, by confirming, netting and settling each counterparty's payment instructions every day.

While the 17 currencies it processes account for the majority of global forex trades, CLS settles only around 60 per cent of the $5tn-a-day market. The rest are largely made up of bilateral market trades or conducted internally by banks.

David Puth, chief executive, said the group had set up committees with authorities in Moscow and Hong Kong to work towards bringing the two currencies into the CLS network, although it was unlikely they would be part of the system until next year.

"The two biggest targets for this year are the renminbi and the rouble. We have formally formed a working partnership with Hong Kong Monetary Authority in the last few months. We also have steering committees with Russian authorities," he said.

Global regulators have pushed to tighten up on systemic risk in the wake of the financial crisis. CLS, overseen by the Federal Bank of New York, was set up a decade ago to reduce forex risk, in which a bank may lose the amount it pays out in a transaction when a counterparty defaults.

It was most starkly illustrated in the 1970s by the failure of Germany's Bankhaus Herstatt. Another German bank, KfW, lost out when it tried to settle its transactions bilaterally with Lehman Brothers as the US broker collapsed.

Regulations are forcing forex derivatives to be processed through clearing houses, which net off investors' trades before settlement. However plans to move into foreign exchange by CME Group of the US and Germany's Eurex, two of the largest derivatives clearing operators, have been hit by regulatory and IT delays. The CME said the hold-up was owing to "a technical issue around the delivery of physical currencies".

"We will adopt several new membership categories in 2014," said Mr Puth. "We are looking at whether there are member categories for clearing houses. We want to work with clearing houses to allow them to settle the physical parts of their trades. It would potentially be done via a separate settlement session. We have an obligation to help the clearing houses to become an active part of the [FX] marketplace."

CLS also completed a £160m fundraising from its 75 shareholders to meet the rules and upgrade its technology to cope with rapidly rising settlement instructions. In August processed nearly 3m instructions in a single day, more than double the amount it received at the height of the financial crisis.

© The Financial Times Limited 2014. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation