In a global landscape marred by economic uncertainty and increasing geopolitical complexities, market participants are more focused than ever on mitigating risks and optimising liquidity. Marc Bayle de Jessé, CEO, CLS examines the evolving dynamics.</em></p> International economic activity depends on the smooth functioning of cross-border payments, which often involve the settlement of an FX transaction. A key risk in FX transactions is settlement risk – the risk that one party delivers the currency it sold but does not receive the currency it bought, resulting in a loss of principal. </p> To mitigate this risk, FX payment-versus-payment (PvP) settlement systems, like the CLS service, ensure that the final transfer of a payment in one currency occurs if, and only if, the final transfer of a payment in the counter currency takes place. </p> PvP’s importance in tackling FX settlement risk is widely recognised by public and private sector initiatives such as the Basel Committee on Banking Supervision (BCBS), which recommends using PvP settlement where practicable, the G20 Roadmap for enhancing Cross-Border Payments, which inter alia</em> aims to facilitate increased adoption of PvP, and the FX Global Code.</p> However, recent FX market growth can be increasingly attributed to emerging market (EM) currencies, for which PvP services are largely unavailable. A good example is the Chinese renminbi, which in recent years has become the fifth most traded currency in the world. To achieve higher PvP rates for EM currencies, progress is needed.</p> Given its systemic importance, adding new currencies to CLS’s settlement service is an extended effort subject to several requirements, including ongoing support from the relevant central bank and the industry, and the target jurisdiction’s laws and regulations may need to be changed. </p> The industry, including CLS, have been exploring ways to expand PvP coverage. However, progress in this area must overcome regulatory and geopolitical challenges, and it will require public and private sector stakeholders to closely collaborate over multiple years to arrive at an industry solution. For now, CLS is focusing on growing CLSNet, its automated bilateral payment netting calculation service.</p> A significant portion of the interbank transaction flow through CLSNet is in the deliverable EM currencies that pose the most settlement risk. By standardising and automating the netting calculation process, the service facilitates the reduction of the payment obligations exposed to settlement risk, while improving operational and liquidity efficiencies. </p> Other market developments also demand attention. As the US and Canadian securities markets move to T+1, market participants face new challenges, including time constraints that may limit the use of settlement services. This could increase FX settlement risk and liquidity needs. </p> Recognising the impact on FX post-trade processes, we have engaged with settlement members and industry bodies, forming an advisory group to address these issues. To ensure operational efficiency in this T+1 landscape, we offer several tools to support the asset manager and fund communities. </p> CLS stands ready to work with policy makers and support its settlement members and the wider community through the evolution of the FX ecosystem.</p>