In a landscape where the only constant is change, Marc Bayle de Jessé, CEO, CLS, discusses the evolving dynamics of the FX market, which serve as both a challenge and an opportunity for settlement risk mitigation on a global scale.</em></p> This year’s shift to a T+1 settlement cycle in the North American securities market, and exchange rate volatility driven by geopolitical events, has kept the topic of risk management front of mind.</p> Initiatives aimed at further reducing settlement risk in the FX market continue to gather momentum. The Financial Stability Board’s G20 Roadmap (G20 Roadmap) for Enhancing Cross-Border Payments and the review of the FX Global Code (due to be published later this year) highlight the increasing importance of payment-versus-payment (PvP) arrangements in mitigating settlement risk. PvP ensures that the final transfer of a payment in one currency occurs only if the payment in the counter currency is received.</p> Addressing settlement risk</h4> The persistent issue in FX settlement is how to mitigate risk in segments of the market not covered by PvP, particularly in emerging markets (EM) where currency trading has surged. According to the Bank for International Settlements</a>1</sup>, the share of non-CLS eligible currencies accounted for 8.5% of global FX turnover in 2022, up from 5.5% in 2010. This growth underscores the need for broader adoption of risk mitigation practices. Extending PvP in EM currencies presents unique operational, legal and regulatory challenges, but it must remain a priority for the industry.</p> There’s a spectrum of settlement practices, starting ideally with PvP settlement, which fully mitigates FX settlement risk, and extending through various netting solutions that help decrease FX settlement risk exposure. You could think of it as a “waterfall” of cascading risk mitigation mechanisms.</p> CLSSettlement sits at the top of the waterfall, settling on average over USD7 trillion a day. We estimate this accounts for 90% of the CLSSettlement-addressable market, and volumes continue to grow. Further down the waterfall, where PvP is not currently available, our CLSNet automated bilateral netting service plays a key role in mitigating risk and improving operational efficiency.</p> The evolution of how we mitigate settlement risk is certainly important. Collaborative initiatives between the public and private sectors will be essential for the further expansion of PvP solutions to address settlement risk in EM currencies.</p> In this respect, we’re actively participating in the FX Global Code review. We’re part of the Global Foreign Exchange Committee’s FX Settlement Risk Working Group, and as a member of the CPMI-led Payments Interoperability and Extension task force, we’re working with a diverse group of public and private sector stakeholders to help achieve the G20 cross-border payments targets.</p> These efforts will help strengthen best practices for FX settlement risk management and encourage the broader adoption of PvP where available, and alternative risk mitigation practices where it’s not.</p> Supporting innovation</h4> On the technology front, we’re also exploring innovation in the FX market, including the potential application of market infrastructure rigour to wholesale central bank digital currencies (wCBDCs). While wCBDCs may present opportunities for enhancing cross-border transaction safety and efficiency, their success will depend on the establishment of robust legal, regulatory and governance frameworks.</p> Working in partnership with the industry</h4> We’re supporting other market infrastructure changes including the move to shorter settlement cycles globally, in line with the US and Canadian securities markets’ move to a T+1 settlement cycle. We’re also working with the FX workstreams of the UK Accelerated Settlement Taskforce and the EU T+1 Industry Task Force to ensure appropriate consideration is given to the FX leg of cross-border transactions. We’re committed to working with policy makers, the buy side and the sell side to mitigate any risks arising from accelerated settlement cycles.</p> The FX industry is evolving across all fronts: market infrastructure, trading and technology. We remain focused on providing innovative solutions that not only mitigate risk, but also enhance the efficiency and stability of the global FX market. Our approach will continue to evolve to meet the needs of the industry in ensuring a safe but innovative FX ecosystem.</p> 1 - BIS Triennial Central Bank Survey</a></p>