Taking the helm of CLS six months ago, CEO David Puth joins the company at a critical juncture. Having
been deemed as systemically important and cited numerous times in the US Treasury?s exemption of FX
swaps and forwards in November, Puth talks to P&L?s Julie Ros about his vision for the future of the utility.
Julie Ros: You joined CLS in August, about a month after CLS
was deemed a systemically important Financial Market Utility
(FMU) by the Financial Stability Oversight Council (FSOC).
Then, November’s decision by US Treasury Secretary Geithner
to exempt FX swaps and forwards cited CLS 28 times in its
post-exemption document. Was CLS actively involved in this
process through conversations with Washington?
David Puth: We were indirectly involved as the industry
represented the importance of CLS extraordinarily well in those
discussions. While we did engage wherever possible, we were
less visible than many of the industry representatives. It was very
clear to CLS from the outset that its role in the market was going
to play an important part in whether the Treasury exemption
went through or not. We’ve had the good fortune of having a
Treasury Secretary who both truly understands the currency
markets and as well, truly understands CLS.
I try to make sure that people make note of the fact that the
Treasury exemption can be revoked if we as an industry don’t
continue to find ways to improve on our risk management or we
slip back. We consider that a very important part of our
responsibilities at CLS.
JR: Having been deemed systemically important, is there a
concern that CLS has become too big to fail?
DP: That responsibility has always been borne by CLS since
inception. While significant investments have been made over
the years to enhance what CLS is able to do, the designation
was something we feel was well earned and was the product
of 10 years, probably closer to 15 years, of a great deal of
effort. But I don’t honestly consider it a burden; this is what
we were built to do.
JR: In the midst of Lehman Brother’s collapse in 2008, CLS
functioned as it should and all trades were settled. Until
then, however, a number of people were sceptical about
CLS, in no small part because of the large costs borne by
member banks. What is your take on the industry’s
perception of CLS today?
DP: I think during the early years of CLS, people regarded it as
an important part of the marketplace, but 2008 demonstrated
CLS was an essential part of the marketplace.
JR: Part of why some say CLS worked when Lehman collapsed
in 2008, was largely because one of the member banks stepped
up and fulfilled its third party obligations. What would happen if
a bank does not step up to fulfil its obligations in the future?
What processes are in place?
DP: The entire way CLS operates is to ensure that the market is
essentially left whole in the event of a member’s inability to pay.
In that case, the loss would be borne by that member who was
not able to pay, but that is the basis on which CLS has been built
– it is that the troubled party would not introduce risk into the
system as a consequence of CLS – the whole basis of
simultaneous payment versus payment.
JR: CLS has lately introduced a dedicated currency programme
team, as well as legal and regulatory teams, how are these groups
DP: Over the last 18 months, one of the things that CLS has
accomplished is the creation of a dedicated currency team. That
team’s mission is to help us actively expand the number of CLS
currencies there are around the world today from 17 to some
larger number in the years ahead. In addition, we have invested significantly in our risk
management resources. Our risk management team has enabled
CLS to work together with our members to look at the current
and future risks associated with settlement.
Our potential work with CCPs would be another example of
areas where our risk, corporate development and legal teams
have come together to do the kind of work that, frankly, I don’t
think would have been possible at CLS several years ago.
Then, above all, our on-going investment in technology and
working in close partnership with IBM ensures that our
performance and capacity are never in question. This permits our
member banks to have full confidence in, not only what CLS can
do today, but what we hope CLS will be able to do tomorrow.
Our Strategy, IT, Operations and Risk teams work together on
strategic issues to further enhance the service we provide to our
members. We are organised in a cohesive manner with all
business units working together to solve a problem.
JR: How many staff does CLS have?
DP: We have 385 employees, along with a number of consultants
that work on our behalf at IBM.
JR: As it looks to increase the number of currencies, CLS is
working with central banks in Brazil, Chile, China, Russia and
Thailand, among others. What determines which currencies you
DP: We work simultaneously on all currencies that are eligible to
be CLS currencies, so there’s not an explicit prioritisation about
how we approach what we do. Our goal is to expand in every
region around the world. We completely acknowledge that there’s
greater demand from the marketplace for certain currencies over others; however, we work very hard to spread our resources
effectively to make sure that we’re engaged with as many central
banks as possible. The process for becoming a CLS currency is a
major undertaking for a country and in virtually every case some
form of legal changes need to take place to ensure finality of a
transaction. The five central banks you cited are those that, at the
current time, are more active, but we’re working with a number
JR: So it’s up to the individual central banks to do a lot of the
DP: It is, and that’s one of our challenges. It really takes a great
deal of effort on the part of a central bank to make these changes.
We work together with the central banks to identify what’s
necessary to become a CLS currency. We have seen many
examples where becoming a CLS currency is critical for the
growth of activity in a country. We’ve seen that specifically in
Israel and prior to that, South Africa, as well as in Mexico.
JR: What would you say the benefits are to emerging markets
DP: Without question, CLS enables a developing market to be a
safer place in which to transact currency through the mitigation
of settlement risk.
JR: I’ve heard concerns voiced about the third party model in the
aftermath of 2008, that some clients can be so large that the bank
member representing them on Third Party CLS doesn’t have a
full picture of their exposures.
DP: We work very closely with our member banks to ensure we
are all cognisant of risks of any third party client and that will continue. That partnership with our members will continue to
evolve in a positive way.
JR: Are you seeing the third party model starting to return?
DP: The third party model is very strong and from my
perspective of the past three months, is continuing to grow. We
have 9,000 third party clients, which is clearly a very robust
JR: Is there a threshold size or turnover required to be a CLS
member versus a third party – because there are some very large
third parties, like Lehman was, for example?
DP: There are no rules around that – we would obviously
encourage those banks that are eligible to become members to do
so wherever possible; however, we do support the third party
model as well.
JR: Should there be rules if a client is the size of Lehman?
DP: Lehman Brothers was actually a special membership
category – they were not a third party in the way that third party
members are today – and they were the only bank in that special
category, but yes, there are a handful of some very large third
parties. We publish the names of those that self-select to become
third parties on our website.
JR: The CLS Aggregation Service has answered a few of the
concerns to do with the third party CLS service, as it addresses
the smaller trades.
DP: Yes, primarily to deal with HFT and the extraordinary
volumes that have come through in smaller transaction sizes.
JR: What are the current volume and compression rates?
DP: As of December 2012, average daily volume of instructions
submitted to CLS was 885,203, while the average daily value of
matched instructions submitted was $4.61 trillion. For the fiscal
year, ADV of instructions submitted was 1,021,223 in 2012,
compared with 1,015,674 in 2011. During 2012, ADV of matched
instructions was $4.7 trillion versus $4.78 trillion the year prior.
CLS Aggregation has compression rates of 95% and higher.
JR: How many member banks are there currently?
DP: We just brought on Swedbank, and Wells Fargo the previous
year, which brings us to 62.
JR: Since the majority of trades settled through
CLS are in highly liquid pairs, would bilateral
netting between major counterparties with CLS
settlement as the end result, provide similar
security for the market?
DP: You would still be introducing the risk of
that bilateral arrangement pre-settlement, so I
wouldn’t necessarily say so. Bilateral netting
only answers part of the question; it doesn’t
answer the whole risk question. There’s
obviously netting within CLS that significantly
reduces risk – from $5 trillion/day down to $50
billion to $200 billion – the efficiency rate is
between 96% and 99%. It is an extraordinary
number in terms of enhancing liquidity.
JR: Were you involved in CLS while you were at
DP: My greatest exposure to CLS came during
my time with the Fed Committee in the late ’90s.
I was less involved after the launch in 2002.
JR: If CLS costs continue to rise for members (I
understand they increased by 47% in December 2011 and another 9.5% in 2012), and the prime brokers are paying the bulk
of this – although some feel they should, because they’re putting
through the bulk of these types of trades – is this the right model
for CLS going forward?
DP: Interestingly, some banks explicitly charge their third parties
for those services. In some cases, they provide third party as a
bundle with other services. But each bank’s arrangement is
different and you’re paying on volume, so it’s a very fair system
in that way.
JR: The effect of last year’s fee rise was that prime brokers
absorbed some of the increase, but PB fees went up, which
meant some smaller participants left the market. Is there a danger
that FX becomes too expensive an asset class for certain client
sectors, particularly HFT, which operates on very thing margins?
DP: We’re deeply committed to operating a highly cost-effective
organisation. For CLS, the evolution of the FX market
necessitates investment in CLS’s infrastructure and processes to
address increased regulatory expectations, performance
improvements and the continued execution of strategic initiatives
that we think will be highly beneficial to the marketplace. The
expansion of currencies and the same day settlement program in
Canada would be the two primary ones that we would mention.
JR: When do you plan to launch same day settlement?
DP: Same day settlement in Canada is on track and on budget
and we expect to launch in the latter part of 2013. We’re very
enthused about what I think will be the completion of that
project. I believe it will give us the opportunity to begin to look
at other markets where same day settlement may also be
JR: Why was Canada selected first?
DP: Same-day trading represents a significant component of
USD/CAD. Plus, the shared time zone with the US makes this
currency pair more manageable.
JR: Who asked for it?
DP: A combination of member banks and central banks. Most
market participants saw the benefits of same day settlement;
think about how far you could take that if you got it going. The
FX market remains without question the most unique market in the world. It’s unique because of the 24-hour nature of trading,
it’s unique because of the extraordinary volumes that go through,
it’s unique because of CLS in many ways – the fact that the
market has CLS and is able to operate in a way that’s different to
the way most of the other markets are operating today. I would
certainly expect that within financial institutions there’d be on-
going support for making sure your FX business is getting the
resources necessary to build given the challenges that exist with
JR: Do you see offering same day settlement in additional
countries in the near future?
DP: This is a fully dedicated effort to just one currency, so it
would take a great deal of effort to move into another currency.
That said, there’s a lot of interest in each region, but it’s a very
complex process. We feel confident that once Canada is up and
running that we’ll be able to look hard at other markets.
JR: What has CLS learned from that process?
DP: That it’s very complex. Frankly, we are notably better
equipped from a resource perspective to be able to take that on.
My sense is that when we first took it on, CLS was a much
smaller company with much more limited resources.
JR: CLS, which launched in early 2002, was originally built when the banks were putting through a much smaller number of
tickets than they do today – estimates are 10,000/day back in the
early days. If you were building CLS today, in a market where a
single prime broker can process more than one million trades per
day, would you build it the same way? What might you do
DP: Obviously technological advances would give us options
to do things differently than we had at the time; however, CLS
has made adjustments along the way to enable performance
and capacity levels that could not possibly have been
imagined at the outset. On our first day of operation, we
settled $38 billion worth of transactions; today we settle
roughly $5 trillion worth of transactions and we have actually
managed to build capacity that we refer to as ‘capacity on
demand’, which means that the cost of the capacity is not
being borne every day, but can be accessed when that
increased capacity is needed. We have wide variations in our
day-to-day volumes that are driven by anything from holidays
to major political events and we need that flexibility in our
system to be able to manage spikes in volumes and be cost
efficient when volumes slow.
JR: During the May 2010 flash crash, CLS is said to have
suffered backlogs. What has CLS done to prepare for another
DP: I can say that, without exception, CLS settled all FX
transactions on time that day as it was built to do. So the simple
answer to that question is that when looking back at 2008,
looking at the flash crash, and looking at Hurricane Sandy, CLS
performed as it was intended to perform and we continue to
identify and work with every possible contingency.
In fact, Hurricane Sandy was quite a challenging situation for
CLS, and for me as well – I was in Osaka when the storm hit.
We had accurately anticipated that there may be issues with our
downtown New York City location.
We have redundancies built into our system that enable us to
run out of two continents at any point in time and we
effectively managed through Sandy without missing a single
payment instruction. So, although our entire North American
staff was displaced, as you can see [sitting in Barclays’ offices
in midtown Manhattan], CLS continued to function exactly as
it was built to function. We moved employees into eight
alternate locations in New York and New Jersey and I couldn’t
be more pleased with how the team performed. We
subsequently consolidated into fewer sites before returning to
our Lower Manhattan office on December 14. We came up
with some interesting technological improvisations that
enabled us – not the core system – to have the business operate
effectively out of multiple sites. It was a real win for the
company and, as I alluded to earlier, CLS technology and
operations worked together to ensure that CLS operated
exactly as it should in this type of situation – it was a real
triumph. Our teams really enjoyed working together from the
I would also like to express my sincere thanks to Barclays and to
Goldman Sachs, as well as to our technology partner Xoriant,
which made space available for CLS employees.
JR: Where are your redundancy sites?
DP: We are in a secure, major data centre site in New Jersey,
and have a similar backup facility outside of London. Through
IBM we are also able to have redundancy sites to run our two
levels of technology. So we are very strong in this area. I can
say that my observation, and that of others who have joined
from major financial organisations, is that the resilience of the
CLS system is equal to or better than that we would have seen at some other financial institutions. We are extremely strong in
JR: Not many things stay static in FX and so far, CLS has had no
challengers in the decade it has been in existence. Do you see
potential for a rival to CLS to arise or do you feel the regulators
are wedded to CLS as the only solution?
DP: I would never be nai?ve enough not to think that another
organisation could come along and do what CLS does. As a
result, we are regularly thinking about that which we can do
better: how can we enhance the system, and how can we operate
it in a faster, better, more cost-effective manner. We appreciate
that we have a head start, both in the 17 currencies that we have
up and running, and our designation as a systemically important
FMU; however, that in no way has led to complacency about
where CLS is today or where we have to be tomorrow. We would
expect there to be others that come along, however, I am not sure
what would motivate another – we are a utility and can perform
these functions extremely well, but we do need to continue to
think about how to do things better.
JR: Is the not-for-profit model still the best for CLS?
DP: Actually, it is a for-profit, utility model. People have referred
to it as a co-operative, but the best way to describe us is as a
market utility. I think the utility model is a very effective model
to run this type of operation. We have a board that is well
represented by the industry and with independent members. We
work to be as commercial as possible by meeting the needs of
the industry in an affordable manner. If you were able to assess the quality of people in the organisation, we’re operating with a
very high calibre team – we are committed to being a private
company that performs a public service. That is what attracted
me to CLS and I think that is what attracted a number of our
team to the company.
JR: Do you have concerns about the regulatory environment in
the US, Europe or elsewhere?
DP: We are pleased with the resolution of the Treasury
exemption and look for harmonisation in other jurisdictions.
There are still unanswered questions for the market that will
need to be resolved over the next several years, including the
role of CCPs in the marketplace, and most importantly, how
does CLS interact with the CCPs. We’ve had a very active
dialogue with that community for some time and it has become
more active. We currently have CCPs that are third party
participants in CLS.
JR: What are some of the more interesting conversations?
DP: It introduces a new type of business into the CLS ecosystem
and we’ve spent a great deal of time studying the risk of CCPs
and their role both with CLS and the broader market.
JR: What can we expect to see next from CLS?
DP: I’d like to say when we’re sitting here a year from now that
we’ve added more currencies to what we’re doing and, critically,
that same day settlement is up and running. You’ll also see a
greater presence in Asia beyond the team we currently have on
the ground in Japan.