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.