Things aren’t looking very well for the foreign-exchange market, as the risk of failed trades is higher than ever, claims the chief executive of CLS, the central bank-backed settlement service, adding that it has struggled to maintain the pace with the rapid growth in the industry.
A deja-vu for CLS
Set up back in 2002, under the auspices of the United States Federal Reserve, and acting as a middleman in trades, being responsible with authenticating and matching instructions, to make sure that payments are made correctly, CLS was put to a big test in the 2008-09 financial crisis. And, unsurprisingly, it went through the same situation this year, as soon as the Covid-19 crisis turned out to be something serious.
In a recent study prepared by CLS and published this week, it was revealed that they are now handling just one-third of the deals that are eligible for settlement. Additionally, $1.25 trillion of daily transitions are now outside its scope due to particularly strong growth in both rouble and renminbi trading, these being just two of the 18 currencies the company can deal with.
“Given the way in which FX trading has evolved, we have to think of additional ways to solve the problem of systemic risk,” says CLS chief executive Marc Bayle de Jesseé.
Trying to keep hold of the situation
CLS is currently in talks with regulators and central banks, as they are trying to include emerging market currencies when they are traded against EUR or USD. Mr. de Jesseeé added that the current risk of disruption appears to be greater than “the original Herstatt risk”, this being a reference to what happened in 1974, when a German bank failed to complete a payment, thus triggering market seizures around the whole world.
This warning echoes the remarks coming from the Bank for International Settlements which, back in December, observed that the share of deals backed by CLS started to fall. This meant that trillions of dollars of transactions were left vulnerable to default risk.