The SWIFT-CLS partnership in FX reduces risk and adds liquidity
By providing the reliable and resilient messaging infrastructure that underpins over $5 trillion a day of gross foreign exchange (FX) flows through CLS, SWIFT is supporting risk reduction and liquidity management in the FX market.
- SWIFT plays a vital role in reducing risk and increasing efficiency in the FX markets by supporting the settlement of cross-currency transactions in CLSSettlement, the global FX settlement service provided by financial market infrastructure CLS
- The average daily value of gross currency flows settled by CLS is US$5 trillion, requiring the 99.99 per cent degree of availability and resilience SWIFT provides
- CLS mitigates settlement risk, in which one party to an FX transaction delivers the currency it sold but does not receive the currency it bought from its counterparty
- In addition to settlement members, a further 25,000 banks, funds, non-bank financial institutions and corporates benefit from access to CLSSettlement through those settlement members who act as third-party service providers
- CLSNet is a bilateral payment netting service for FX trades not settling in CLSSettlement. It allows FX market participants, whether they are a member of CLSSettlement or not, to net trades directly with other market participants prior to settlement through the correspondent banking system
- For banks that need more immediate access to liquidity, the CLSNow service will allow banks to exchange liquidity positions across currencies on a near real-time basis in five major currencies while mitigating settlement risk
The role played by SWIFT in reducing risk and increasing efficiency in the settlement of cash payments and securities markets is widely understood. Less well-known is the support SWIFT provides to the FX markets. Yet all of the FX settlement instructions flowing through CLSSettlement, the global FX settlement service provided by CLS, are SWIFT-compliant ISO 20022 or FIN messages.
The message flow is enormous. Even on an average day, three million SWIFT messages are sent by FX market participants to CLS. The daily value of the currency flows being exchanged through these messages averages US$5 trillion, but occasional volume spikes can drive it up to over twice that figure. The SWIFT network is available 24 hours a day, seven days a week, and is highly resilient. The availability of SWIFT services is never less than 99.99 per cent.
SWIFT and CLS have now worked together since the payment-versus-payment (PvP) settlement service was established, at the behest of the G20 central banks, in September 2002. The goal was to mitigate settlement risk, in which one party to an FX transaction delivers the currency it sold but does not receive the currency it bought from its counterparty which would result in a loss of principal. CLSSettlement mitigates this risk in the portion of the FX market it covers by simultaneously settling the payment instructions on both sides of an FX transaction using its PvP settlement service.
CLS settles payment instructions relating to FX trades in eighteen currencies between 71 banks that are direct settlement members of CLS, and for over 25,000 third parties, including funds, banks, non-bank financial institutions and multinational corporates that access CLSSettlement indirectly through settlement members.
Introducing a currency to CLSSettlement is subject to specific eligibility criteria that address business, risk, regulatory, legal, compliance and system functionality requirements, including domestic support from the central bank and other authorities, currency convertibility and acceptable exchange controls and settlement finality. Fortunately, 90 per cent of all FX trades by value take place in CLSSettlement-eligible currencies which means a high proportion of FX volume is supported by CLS.
The overall reduction in settlement risk delivered to market participants by CLSSettlement is extremely valuable. In addition to this, CLS clients benefit from significant liquidity savings – with their funding requirements to meet their currency payment obligations reduced by 96% or more through multilateral netting, (where each settlement member only transfers the net amount of its combined payment obligations in each currency). If member-banks had to settle gross, the consequent loss of capacity would bring the global FX markets to a halt.
In other areas such as processing, CLS has used its unique position in the FX market to launch new services which bring greater standardization, efficiency and risk mitigation to the post-trade environment. CLSNet, which was launched in November 2018, is a standardized, automated bilateral payment netting service for buy-side and sell-side institutions. Operating on a distributed ledger technology (DLT) platform, CLSNet introduces risk mitigation for trades not settling in CLSSettlement in approximately 120 currencies by standardizing and automating post-trade matching and netting processes. It is the first global FX market enterprise application running on blockchain in production.
This year will see CLS further develop its settlement services through the launch of a same-day gross PvP settlement service, CLSNow, to mitigate settlement risk and optimize the use of available liquidity in the same-day market. The service, supported by SWIFT, will support settlement in five currencies: US dollars, Canadian dollars, UK pound, euros and Swiss francs. Through the CLSNow service, banks will be able to exchange liquidity positions across currencies on a near-real-time basis while mitigating settlement risk. This intraday rebalancing tool will reduce dependency on money markets and enable banks to optimize their balance sheets across currencies.
The value of liquidity management, in light of post-crisis regulations designed to ensure that banks always have sufficient assets at hand to meet their short-term obligations, is hard to over-estimate. CLSSettlement, through multilateral netting, already makes a major contribution to alleviating the pressure on the banks, and CLSNow will provide further relief as it grows. The strong relationship between SWIFT and CLS plays a vital role in delivering those benefits to FX market participants.
If you would like to know more about CLS read our interview with Alan Marquard, Chief Strategy and Development Officer at CLS, here.
 The launch of CLSNow is subject to any necessary approvals
 Comprehensive details on the eligibility criteria are provided in the CLS Bank International Rules
 CLSNet’s coverage will include all currencies that are not issued by countries on a sanctioned list that would prevent CLS from conducting business with those countries and their issued currencies.
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