A Look Ahead. Marc Bayle de Jessé speaks to E-forex
After describing some of the recent investments in technology his organization has been making, Marc Bayle de Jessé, CEO of CLS, outlines what its priorities are going to be over the coming year and what lies in store for the industry.
As you approach your fourth year in the role, what have been the highlights of your tenure thus far?
I joined CLS in December 2019, just as the COVID-19 pandemic was beginning. It was a challenging time, and we had to adjust our working model overnight. However, I was fortunate to be part of a team that was able to adapt quickly and effectively. Despite the market volatility that followed and a sharp increase in CLS volumes (approximately 20% higher than average in March 2020), we continued to deliver robust services to the FX market every day.
During this time, we continued to invest in our technology to enhance our services capacity. We completed a significant phase of our multi-year technology investment program – Convergence – to migrate CLSSettlement to the Unified Settlement Platform (USP). Convergence went live in June 2021; and as a result CLS has one of the most sophisticated, resilient, scalable and flexible post-trade technology platforms across global financial market infrastructures (FMIs), which enables us to develop our services more easily to meet the requirements of an evolving FX ecosystem.
The growth of PvP settlement volumes and the CLSSettlement community has also been a real highlight. Since I joined, we have experienced a 10% increase in volumes, settling an average of USD6.5 trillion per day in 2023. This upward trend is of particular importance to me given CLS’s purpose is to mitigate settlement risk in the FX market.
We are also proud of the growth of CLSSettlement, primarily driven by the asset manager community. Over the past three years, we have seen a remarkable 25% rise in the number of entities from around the globe settling through CLSSettlement via our settlement members, representing about 35,000 banks, funds, non-bank financial institutions, multinational corporations and other third-party participants. Notably, almost 80% of the top 250 investment managers are now settling through CLSSettlement via their custodian banks.1
The increasing awareness of settlement risk in emerging market (EM) currencies and the collaboration between the public and private sectors to resolve it have also been noteworthy. This is a great example of how the FX industry constantly seeks to evolve by identifying issues and exploring solutions. As the FMI at the center of the FX industry, we take pride in being a part of these collaborative efforts.
What are the biggest challenges you have faced in your role thus far?
I see three main challenges: first, to clearly identify areas in the market where settlement risk still exists and find ways to mitigate it further; second, to find concrete solutions for EM currencies; and third, to ensure operational excellence.
CLS’s role is to help the FX industry find solutions to industry challenges while maintaining the highest operational standards. One of the key challenges is demystifying the scope of settlement risk across a participant’s FX trading portfolio. To tackle this, we collaborated with a subset of our members and analyzed trading activity to determine how their trades were being settled. This analysis provided valuable insights into how market participants manage settlement risk and the various settlement mechanisms they employ. Our analysis showed that of their CLSSettlement-eligible transactions (which comprise approximately 80% of the total global FX market according to the 2022 Bank for International Settlements (BIS) survey), on average 51% of the traded notional is settled through CLSSettlement, while much of the remainder relates to inter-branch and inter-affiliate trades (35%) and trades that settle over accounts within the banks’ direct control or via a single currency cashflow (together, 8%). This leaves around 6% of trades exposed to FX settlement risk that are eligible for CLSSettlement, and we are confident we can help address these volumes.
Rising settlement risk in EM currencies is an industry challenge we are looking to tackle. Adding currencies to CLSSettlement requires ongoing support from the relevant central bank and can require changes in the target jurisdiction’s laws. Given these challenges, we are focusing our efforts on addressing this issue by enhancing CLSNet, our standardized, automated bilateral payment netting calculation service across 120 currencies. CLSNet reduces payment obligations exposed to settlement risk while improving operational and liquidity efficiencies. The good news is that a significant proportion of the interbank transaction flow through CLSNet is in the deliverable EM currencies that pose the most settlement risk for our settlement members.
As an FMI, ensuring the resilience of our operations has been a key priority for me and the team. In the face of market instability caused by current macroeconomic conditions, we have made significant efforts to maintain operational excellence. This has involved not only technology investment, but also an ongoing program of work across our operational 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.
Robust risk management is critical to operational resilience. CLS’s risk management framework is based on a robust and integrated approach that considers all relevant risk including credit, market, liquidity, operational, legal, compliance and reputational risks. As a global FMI, we must adopt both sophisticated and flexible risk management practices that can adapt to risks originating from financial market fluctuations. As part of our ongoing efforts, we continuously enhance our risk management frameworks, policies, and procedures to ensure their effectiveness. This involves identifying, assessing and managing risks, while also strengthening the risk culture within our organization. We remain committed to working closely with our key stakeholders in this critical area.
What are the priorities for CLS going forward?
Beyond addressing FX settlement risk through increased adoption of CLSSettlement, continuing to drive the momentum behind CLSNet is a key focus. Over the past year, CLSNet has experienced very rapid growth and now includes eight of the top 12 global banks. We anticipate that this trend will continue. In Q1 2023, the service recorded a year-on-year increase of over 400% in the average daily volume of net calculations, and in June 2023, it hit a record peak of USD306 billion.
Another priority is educating relevant stakeholders about the importance of mitigating settlement risk. We aim to ensure that market participants are aware of our ancillary services that deliver risk mitigation for various FX products, such as our cross-currency swap service. Participation in this service increased in 2022, with a 60% year-on-year increase in the value of cross currency swap trades processed in Q4 2022.
As the critical service provider to the FX market, we uphold the highest levels of operational resilience above all else – across infrastructure, controls and cybersecurity. We have invested significantly in the technology underpinning our services, and maintaining these unparalleled levels of operational resilience will continue to be our top priority.
What do you think will be the big themes in the FX industry for 2024?
The countdown has begun for the transition to T+1 securities settlement in the US and Canada. This change will have implications for the FX industry, as the FX component of cross-border securities transactions will need to be settled before the security. CLSSettlement can support the trade flows resulting from a move from T+2 to T+1. However, time zone and/or operational constraints may require some cross-border market participants to accelerate FX execution to secure the necessary liquidity. We established a dedicated advisory group to address this issue and are actively engaging with our settlement members and relevant industry bodies. We are also exploring the potential impact it might have on same-day settlement activities and whether and how to adapt our services accordingly.
Another pressing concern for the FX industry is the implementation of the Standardized Approach for Counterparty Credit Risk (SA-CCR).2 We are currently working with our settlement members and central counterparties to determine the best ways to support them in optimizing capital for the transition to the new rules.
Finally, according to recent research conducted by the BIS, 93% of the global central banking community is exploring digital versions of their currencies. Undoubtedly, this will continue to be a big theme in the coming year. If and when CBDCs are implemented by one or more major central banks, market infrastructures will probably need to be adapted to become accessible to wholesale market participants, and thus impact CLS as well. We have established an innovation lab to follow and support these initiatives where relevant to CLS.
To better understand FX market challenges, we have introduced a series of whitepapers to raise awareness and understanding of settlement risk and offer insights on key industry developments.
1 Excluding Chinese-based investment managers
2 SA-CCR applies to over-the-counter (OTC) derivatives, exchange-traded derivatives and long settlement transactions bis.org/basel_framework/chapter/CRE/52.htm