CLS Group is planning to release a payment netting service,
CLS Netting, for buy and sell-side institutions’ FX trades that are settled
outside of its settlement service.
Firms will have the choice of connecting to the service via existing
channels or by utilising Distributed Ledger Technology (DLT).
CLS claims that the global FX market is limited by the lack
of a standardised payment netting process for trades not settled within CLS.
The firm claims that in many cases institutions are forced to intervene
manually to complete the process, leading to inconsistent and bespoke
approaches to netting throughout the market, which in turn results in higher
costs and increased intra-day liquidity demands.
“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,”
says David Puth, CEO of CLS.
CLS says that its existing netting capabilities, combined
with its incumbent position as a post-trade service provider in the FX market,
mean that it is well positioned to provide standardised and expanded bilateral
payment netting capabilities for the entire FX market.
Participants will be able to submit FX instructions for six
products, including NDFs and 24 currencies, over existing Swift-based channels.
They will also have the option of connecting directly to the platform via a
secure, permissioned distributed ledger, administered by CLS.
CLS will build the DLT platform for CLS Netting using
Hyperledger Fabric, an open-source solution, and is collaborating with IBM to
try an ensure that the platform meets the requirements necessary for delivering
a resilient, secure, and scalable service.
“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,” says Martin Jetter, senior vice
president, IBM Global Technology Services.
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, comments: “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, standardisation, scalability and flexibility required to create a
meaningful network effect across the financial industry.”
John Blythe, global head of currency operations, at Goldman
“This is an important development for the post-trade
landscape. CLS Netting will not only reduce risk in the FX market, but also
optimise 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.