Chief Executive Officer’s report
As we exit the second year of the Covid-19 pandemic and enter our 20th year of operations, the FX market continues to adjust to volatility, related to the challenging global environment including rising inflation, rising energy prices and changes in monetary policy. These factors have had a significant impact on the FX market, resulting in record traded values throughout most of the year.
This is reflected in our own operational performance. Apart from a slight, and expected, drop during July and August, we continued to see a marked increase in the overall value of instructions, of 5% year-on-year. This was driven predominantly by three factors; first, our own continued efforts to increase uptake in CLSSettlement, especially third-party participation which accounted for 90% of all new business growth; second, the overall growth in market activity; and third, a heightened focus on risk mitigation across the industry. As highlighted in my interim message, the asset manager and pension fund community have been of particular focus, as they continue to diversify global assets, leading to a subsequent heightened awareness of FX settlement risk management and operational efficiency within their portfolios. Third-party participants now total over 30,000.
Settlement risk continues to be a significant topic of discussion and debate across the public and private sectors. Public policy proposals acknowledge the need for greater settlement risk mitigation, including 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 has also published an updated version of the FX Global Code. This includes changes to the settlement risk principles, including greater emphasis on the use of PvP mechanisms where available, and provides more detailed guidance on the management of settlement risk where PvP settlement is not used. In our role as a global FMI, we are both actively involved in these discussions and proactively working with the market to explore potential solutions. We are uniquely placed at the center of the FX industry to work in partnership with the public and private sectors to develop settlement risk mitigation solutions that will minimize settlement risk for currencies that are not currently eligible for settlement in CLSSettlement.
“In 2022 we will be celebrating 20 years of our contribution to the stability, security and growth of the global FX ecosystem, thanks to delivering unprecedented levels of risk mitigation, liquidity optimization and operational efficiencies.”
On the private side our efforts have focused on working with 12 banks, a subset of our settlement member community, to explore potential means to address this settlement risk and in September we formally announced the launch of the pilot I referenced in my interim statement. The support received from our settlement members through their participation in the working group and pilot is a vote of confidence in our ability to solve this industry challenge, by adapting our service offering to meet evolving market needs. However, we must continue to recognize that any such solution must prioritize safety, stability and scalability and will require detailed and measured consideration for appropriate implementation.
In this context, we are engaging the market regarding the uptake of CLSNet – our bilateral payment netting calculation service – which is already open for approximately 120 currencies.
This highly effective service is designed to reduce risk and deliver efficient, automated, and standardized posttrade netting calculation and processing services for banks, asset managers and corporates across the globe. Importantly, it also supports both buy-side and sell-side adherence to the FX Global Code.
Connectivity with the platform expanded substantially in 2021, resulting in a more than doubling of gross volumes submitted, and demonstrating that the service is delivering tangible benefits to our clients. And while the onboarding of new participants slowed during the height of the Covid-19 pandemic, the overall pipeline of new joiners is strong, including several large banks and asset managers.
Other CLS services also continued to see an increase in uptake, with CLSTradeMonitor growing among the asset manager community, thanks to its integration into State Street’s TradeNeXus centralized post-trade dashboard. This allows the buy-side to efficiently manage all their FX post-trade workflow within one platform, which is proving extremely valuable among our third-party participants. This increased adoption demonstrates demand for an integrated solution that supports post-trade processes across FX transactions and we expect to see further uptake of the service during 2022
Our cross-currency swaps service also saw continued growth during 2021, both in terms of values and volumes processed. This service, which uses the MarkitSERV trade confirmation platform to allow settlement members to send their cross-currency swaps into CLSSettlement for settlement, also saw a new joiner in July. We have long advocated for greater PvP adoption to mitigate FX settlement risk, and increasing cross-currency swap flows to CLSSettlement can only help to achieve that.
In response to growing demand from our clients for accessible and digestible FX market insights, we launched an additional two new datasets to capture outstanding forward and swap positions in the FX market, in addition to making enhancements to our existing CLSMarketData suite. These outstanding forward and swap position reports are delivered daily, helping all market participants to benefit from increased visibility into cash flow and directional positioning, which will add market color and support pre-trade and post-trade analysis. As we continue to refine our datasets, market interest has grown across all client sectors with many users now signing up to multi-year contracts, up 75% year-on-year.
We are constantly assessing and evaluating new methods to improve our services for the benefit of our members and the completion of the Convergence program is testament to our commitment to this strategy. While its completion is a major step forward, there is still more to be delivered to further strengthen our technology infrastructure, operational resilience and risk management. These efforts will continue to impact our financials for a further two to three years.
A significant proportion of our investment will now be focused on finalizing long-term hosting and support agreements with our key technology partners. In addition, as we progress the implementation of a hybrid working model in response to the pandemic, we will be focusing on delivering technological and office enhancements over the next few years that support our colleagues in this new way of working.
A strong focus for our investment policy is the ongoing enhancements to operational resilience, cybersecurity and three lines of defense. As a global FMI we are committed to upholding the highest operational standards and continuing to deliver the stable, secure and high-quality services our clients expect every day. This is particularly important given the major global challenges we are currently facing, such as increased cyber security risk and the ongoing economic impact of the pandemic.
A service to rely on
As Ken highlights, in 2022 we will be celebrating 20 years of our contribution to the stability, security and growth of the global FX ecosystem, thanks to delivering unprecedented levels of risk mitigation, liquidity optimization and operational efficiencies . As we pass this milestone, it is important that we all reflect on why you have placed your trust in us every day and what we deliver to you in return – now and in the future.
As we look to 2022, our commitment to you is to continue delivering the services with which you have entrusted us at the highest level of efficiency, service quality and resilience across our entire product set. We also look forward to partnering with you and the broader ecosystem to find opportunities to further mitigate risk and to create both operational and capital efficiencies.
Finally, 2022 is the year we bid farewell to Ken, who has chaired the Board of CLS for the last eight years. Ken’s dedication and commitment has helped guide CLS through a significant phase in our evolution, cementing our credibility as the trusted market partner for mitigating FX settlement risk. On behalf of the Executive Management Committee, I thank him for his energy and support and look forward to continuing to reinforce CLS’s role and relevance in the FX global ecosystem with our new Chair, Gottfried Leibbrandt.
Marc Bayle de Jessé
Chief Executive Officer