Chief Executive Officer’s report
2022 was a year in which we strengthened our financial position while continuing to invest heavily in our organization at a crucial moment in CLS’s history.
Part of our commitment to delivering trusted services to our clients and the market is to ensure we continue investing in the resilience of our services, and across our infrastructure, controls and cybersecurity. This is by no means a new concept for us – a highly resilient operating model has always been fundamental to our role at the center of the FX market. We are committed to ongoing improvement and have identified several enhancements to ensure we maintain optimum levels of resilience. This has culminated in an ongoing program of work across our technology and operations functions, as well as the engagement and support of our settlement members to ensure they have taken all the necessary measures to protect themselves as part of the broader CLS ecosystem.
As we close the year we can reflect on both our strong financial performance and on our broader contribution to the FX ecosystem, which over the last two decades has seen FX market turnover grow by a factor of five since we launched CLSSettlement in 2002. I believe CLS has been a key contributor to that growth, both from a settlement risk mitigation perspective and also with regard to the liquidity and operational benefits we provide.
As the market continues to evolve, our role in mitigating settlement risk becomes increasingly important. The value of our services lies in the network effect and our position at the center of the FX ecosystem. The more participants who access our services, the more all parties benefit. At launch, 39 members had direct access to CLSSettlement, today we have over 70 members and more than 30,000 third parties who use our service.
“As the market continues to evolve, our role in mitigating settlement risk becomes increasingly important. The value of our services lies in the network effect and our position at the center of the FX ecosystem”
When it comes to expanding settlement risk mitigation more generally, in recent years both regulators and industry participants have become increasingly concerned about the level of FX settlement risk across the market. Our own independent analysis of some of our settlement members’ book of transactions has shown that while CLSSettlement is extremely effective and addresses the large bulk of settlement risk across the 18 currencies we settle (an estimated 90% plus of eligible transactions for CLS PvP are going through our main settlement service*), there remains a proportion of FX transactions that are not settled on a PvP basis, notably from trading in emerging market currencies. Given the current macroeconomic and geopolitical environment, it is no surprise that there is a heightened focus on overall risk management in cross-border payments as both the public sector and market participants call for greater adoption of PvP mechanisms to mitigate the rise of settlement risk.
The reality of expanding PvP adoption to address this risk poses some extensive macro challenges. As a systemically important financial market infrastructure, we at CLS must ensure that the infrastructure supporting global financial markets is robust and able to withstand financial shocks.
Adding new currencies to CLS is an extended effort subject to several complex factors, particularly the necessity of verifying that critical legal risk and liquidity standards are met in the jurisdiction whose currency is onboarded. However, we believe there are opportunities to address this risk in ways other than expanding the reach of CLSSettlement, and to this end we are exploring several options for extending our bilateral payment netting calculation service – CLSNet – to support emerging market currencies. Despite the challenges involved, this service already goes some way to addressing the operational risk associated with trading emerging market currencies.
As with all industry-wide initiatives, including the original development of CLSSettlement, the delivery of trusted market solutions to address the remaining FX settlement risk will take time to define and implement.
Progress in this area does not result solely from strong industry cooperation and technology advancements – we already have the requisite technology, oversight, governance, credibility and support of our members. Instead, progress will result from capitalizing on a stronger private-public sector partnership to overcome external barriers and obstacles to expanding PvP coverage.
Operating within the context of market instability due to current macroeconomic conditions, the importance of the services we currently provide is clear. This is reinforced by our operational performance throughout 2022, in which we witnessed a sustained period of growth in volumes and values in both CLSSettlement and CLSNet.
In financial performance terms this translated into a revenue increase of 6% year-on-year. While revenues largely arise from CLSSettlement, CLSNet activity is growing. In 2022 it grew exponentially, exceeding the USD100 billion daily notional netted barrier for the first time in August 2022, as new participants were onboarded to the service and active usage increased. We welcomed MUFG Bank, the first Japanese bank to commit to using CLSNet. In doing so, MUFG joined the expanding CLSNet community, which now includes eight global banks. As the global network continues to grow, participants will benefit from the expanding range of netting counterparties, as well as the improvements to liquidity optimization, operational efficiencies and the risk mitigation benefits of the service.
Other CLS services continued to see an increase in uptake, with our cross- currency swaps (CCS) service experiencing continued growth during 2022. We also broadened the reach of the service by adding SwapAgent as another submission channel. This gives settlement members the flexibility to use either SwapAgent or MarkitWire to submit their CCS trades to CLSSettlement, providing greater ease of use and access to the service. CLSMarketData saw strong growth year-on-year with the release of three new datasets to further support our clients’ needs and provide greater insight into FX market dynamics.
From a cost management perspective, we remained focused on strong management of our overall cost base. Operating expenses were down GBP10 million year-on-year (4%), in part helped by a concerted effort by management to identify savings across the business. Overall, 2022 financial performance heralded a return to profitability with a profit before tax of GBP9.2 million for the year. We will continue to focus on financial prudence and retain a capital position well in excess of regulatory requirements.
As we look to 2023, our focus will be on delivering our services effectively and seeking opportunities to continue enhancing our core value proposition. This includes driving uptake in our services, investing in our infrastructure, expanding the reach of our products and exploring new ways to further mitigate risk and create operational efficiency, while delivering the highest levels of service quality and resilience across our entire product set.
Marc Bayle de Jessé
Chief Executive Officer