Tokyo/London/New York: CLS, a market infrastructure group delivering settlement, processing and data solutions, announced today that the first Japanese-domiciled funds have access to CLSSettlement as third-party clients.

Asset manager Fidelity International and The Master Trust Bank of Japan, Ltd (MTBJ), a trust bank exclusively engaged in asset management, have the first Japanese-domiciled funds to settle foreign exchange (FX) transactions in CLSSettlement. This marks the start of a coordinated industry-wide effort to onboard the Japanese buy-side community to CLSSettlement over the next few years.

Fidelity International and MTBJ are being supported by Brown Brothers Harriman & Co. (BBH), which acts as MTBJ’s custodian for non-Japanese securities and related currency movements outside of Japan. BBH has made its third-party access to CLSSettlement available to facilitate MTBJ’s settlement of FX transactions.

The planned introduction of Japanese funds into CLSSettlement is the result of discussions and detailed planning across multiple stakeholders within the FX and securities services market over a number of years including trust banks, asset managers, custodians, FX brokers, Bank of Japan and CLS, as well as the Financial Services Agency of Japan (FSA). Following guidance from the Basel Committee on Banking Supervision recommending the use of payment-versus-payment (PvP) settlement and netting where appropriate to all market participants, the FSA sought to bring together Japanese wholesale FX market participants to promote PvP settlement and assist the industry in adopting CLSSettlement.

The FSA established the “Roundtable on risks associated with the settlement of FX transactions”, which was instrumental in obtaining industry alignment alongside other collaborative efforts between all stakeholders.

Japan is one of the world's largest centers for currency trading and a crucial hub for the Asian FX community. The Japanese FX market accounts for 6.1% of global over-the-counter FX turnover.[1] In recent years it has benefitted from a significant increase in cross-border currency flow and foreign direct investment, but this has also increased exposure to a wider range of market participants including funds and their counterparties.

Toshiya Oshima, Head of Asset Management Operations, Japan, of Fidelity International commented: “We manage diversified portfolios globally with exposure to a broad range of domestic and international FX counterparties. The ability to settle FX trades via CLS mitigates a large proportion of risk associated with currency trading, and it also adds another level of control and enhancement to our trading and risk management operations. Broadening our capacity to trade with CLS-enabled counterparties in a greater number of international markets will help enhance investment performance and reduce risks faced by our clients.”

Sharon Maher, Head of Market Services from Brown Brothers Harriman &Co. added: “As an overseas custodian, we are gratified to help MTBJ bridge domestic JPY settlement to the global risk mitigation facilities of CLS that take place outside of Japan. This is an important milestone for the Japanese FX market and we look forward to continuing our work with our custody clients to facilitate the delivery of global risk mitigation standards to the asset management community in Japan.”

The addition of Fidelity and MTBJ is the latest development in the continued growth in participation in CLSSettlement from third-party clients. Industry-wide stakeholders of Japanese fund businesses have agreed with the FSA to adopt a two-phased approach to implementation. The initial phase (calendar year - Q4 2018 to Q1 2019) will focus on onboarding transactions executed by global asset managers and FX brokers using the existing market infrastructure and other higher risk transactions. In the “full-fledged phase” (Q4 2019 to Q3 2020), the scope will broaden to include transactions outside the initial scope.

There has been a 12% increase in the number of third-party participants using the service in the Asia Pacific region since 2015. Since early 2017, CLS has seen settlement activity from a growing third-party community including its first Japanese institutional investor, first corporate institution as well as the first Korean fund participants in CLSSettlement. Third-party participation globally accounts for approximately 22% of the total value settled in CLS.

Rachel Hoey, Head of Asia and Head of Data Business at CLS, said: “Expanding third-party settlement services is a crucial part of CLS’s strategy to maintain and improve stability in the FX market. The addition of Fidelity International and MTBJ in Japan, with the support of BBH, demonstrates the continued demand from non-bank financial institutions seeking to access CLSSettlement. It reflects the rising trend of the buy-side becoming more actively involved in managing settlement risk, more aligned with global practices to accommodate shortening cycles in securities settlement, more transparent in funding commitment and benefiting from the liquidity efficiencies unique to the CLS system.  

“We look forward to continuing our work with the FSA and the financial community to encourage and facilitate participation, delivering the unique benefits of CLS and helping to build a more robust and efficient global FX market.”

[1] Bank for International Settlements Triennial Central Bank Survey, 2016