CLS launches settlement for same-day USD/CAD trades

David Puth at CLS
David Puth, CLS

Foreign exchange settlement risk mitigation utility CLS will this week enable members to settle same-day trades in US/Canadian dollars (USD/CAD), marking the completion of the first stage of a project that was identified as a priority by regulators in 2008.

Same-day trades could not previously be settled through CLS because the utility requires more than a day to settle an FX trade. In a major report on progress in reducing FX settlement risk, published in May 2008, the Basel-based Committee on Payment and Settlement Systems called on providers of payment-versus-payment settlement, including CLS, to continue developing services for settling FX trades that contribute to risk reduction, with "particular emphasis" on possibilities for settling same-day and certain next-day trades.

While data on the proportion of the FX market that settles on a same-day basis is difficult to come by, same-day settlement represents a large chunk of USD/CAD trading and the two currencies operate in the same timezone, making it a natural choice to go first. In the preliminary results of the latest triennial turnover survey by the Bank for International Settlements, published on September 5, the Canadian dollar remained the seventh most traded currency, accounting for 2.3% of turnover, while USD/CAD represents 3.7% of turnover.

"Same-day settlement for the US and Canadian dollars is one of the most significant achievements for CLS and its members in 2013. The settlement of same-day trades became a priority following the financial crisis of 2008. We believe our technology will enable additional same-day sessions globally in the future," says David Puth, chief executive of CLS in New York.

Same-day settlement will run as a separate instance to the main settlement session within CLS with its own operational timeline for the submission, matching and settlement of trades within a single day. Seventeen banks – all of which are CLS settlement members – are expected to use the service, with nine of them live at launch. The others will join by early 2014 and additional members may join up to six months after the launch, while third-party members will be able to access the service within seven months of launch.

Same-day settlement for the US and Canadian dollars is one of the most significant achievements for CLS and its members in 2013

Market participants and regulators have welcomed the launch of CLS same-day settlement as a means of creating more robust and consistent risk management in USD/CAD trading, but some caution it has required considerable time and expense to get the necessary technology and processes in place, and the effect on liquidity remains to be seen.

"We look for settlement risk mitigation in every part of our business and same-day settlement has very large volume numbers attached to it – more than shareholders sometimes would like to hear – so this gives further comfort with regard to risk management in that trading activity. It will take time to evolve and I do think there will be some growing pains. We are cautious about the time efficiency and how the market will remain liquid during any given day when it goes to CLS. People will rush to get trades through CLS and that could affect liquidity," says CJ Gavsie, head of foreign exchange products at Bank of Montreal Capital Markets, one of the 17 banks that will use the service.

Same-day settlement is scheduled to launch for USD/CAD on September 23 and CLS is also considering expanding to other currencies, with particular focus on the Mexican peso (MXN). It is establishing a member advisory group to review the Mexican peso market for inclusion in the Americas same-day session, and plans to establish an additional advisory group next year to review European and North American currencies for settlement in a second same-day session.

"Same-day settlement is an important offering that CLS is on the cusp of starting up. Once that moves forward with USD/CAD, it will be interesting to see what other currency pairs could be added. USD/MXN would be an obvious addition and then the more interesting challenge, and probably the one that could be of interest to certain banks, would be any of the European currencies, including the euro," says one central bank official involved in the oversight of CLS.

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