The global FX market is limited by the lack of a standardized payment netting process for trades not settled within CLS. In many cases, institutions are forced to intervene manually to complete the process. This leads to inconsistent and bespoke approaches to netting throughout the market, resulting in higher costs and increased intra-day liquidity demands.
David Puth, CEO of CLS, commented “Working with our settlement members and the buy-side, we have developed CLS Netting to address these challenges. The service will leverage our unique infrastructure, expertise and position as a trusted post-trade partner. It is a significant step forward in reducing risk and providing further efficiencies and resilience across the global FX market. CLS Netting is a critical component of our strategy to deliver a comprehensive suite of post-trade and risk mitigation services for the entire FX market.”
CLS’s netting capabilities are an integral component of the settlement service its members and third-party clients benefit from every day. This existing capability, combined with the company’s position as a trusted post-trade partner, means CLS is ideally placed to deliver a service that will standardize and expand bilateral payment netting capabilities for the entire FX market.
Participants will be able to submit FX instructions for six products, including non-deliverable forwards (NDFs), and 24 currencies over existing SWIFT-based channels. They will also have the option of connecting directly to the platform via a highly secure, permissioned distributed ledger, administered by CLS.
CLS will build the DLT platform for CLS Netting using Hyperledger Fabric, an industry-accepted, open-source solution, and is collaborating with IBM to help ensure that the platform meets the requirements necessary for delivering a resilient, secure, and scalable service.
As a founding member of the Linux Foundation’s Hyperledger Project, CLS continues to engage with a wide group of partners to identify and establish best practices and innovative solutions for the use of open-source technology across payment and financial market infrastructures. This will ensure that standards, security and resilience are factored into the basic underlying platform of any software released.
“This is an example of the type of transformational change that distributed ledgers and permissioned blockchain networks are bringing to the financial markets and other industries,” said Martin Jetter, Senior Vice President IBM Global Technology Services. “CLS and IBM have worked together for many years to continuously innovate, bringing security-rich technologies that can speed transactions and help reduce risk for the world’s global markets. This is another important technological advancement and an important next step in our partnership.”
Subject to receiving the necessary approvals, CLS will deliver the service in a phased approach. The first phase will deliver a payment netting service for FX spot, forwards, NDFs, swaps, tomorrow/next day and same-day trades across the 18 currencies CLS currently settles, as well as the Chinese renminbi (offshore), Russian ruble, Polish zloty, Turkish lira, Thai baht and Czech koruna. Following the delivery of phase one, CLS will expand the service to include more currencies and attributes.
Tom Zschach, Chief Information Officer at CLS, added: “By bringing our expertise and connectivity across post-trade FX, our never-ending focus to improve security and resilience and the innovation of DLT together, CLS Netting will offer a solution that can be used by the broadest range of FX market participants in a safe and efficient manner.
“Working with IBM to deliver CLS Netting using an open-source DLT solution will ensure the appropriate levels of confidentiality, security, standardization, scalability and flexibility required to create a meaningful network effect across the financial industry.”
John Blythe, Global Head of Currency Operations, at Goldman Sachs commented: “This is an important development for the post-trade landscape. CLS Netting will not only reduce risk in the FX market, but also optimize liquidity and operational practices which are fundamental to success in the current FX market.”
The following market-leading institutions have committed by way of agreement to support the release of CLS Netting: Banco Actinver, Bank of America, Bank of China – Hong Kong, Bank of Tokyo-Mitsubishi UFJ, Citibank, FirstRand, Goldman Sachs, Goldman Sachs Asset Management, HSBC, Intesa Sanpaolo, JPMorgan Chase, Morgan Stanley, Neuberger Berman and Northern Trust.