CLS Explores FX Settlement: In a bid to address the impending U.S. Securities and Exchange Commission (SEC) rule change affecting the settlement of U.S. equity transactions, CLS, the world’s largest multi-currency settlement system for foreign exchange (FX) trades, is set to decide in the first quarter of 2024 whether it can introduce a delay in settlement instructions for currency trades. This potential adjustment aims to offer relief to foreign asset managers at risk of failed transactions due to the SEC’s move to shorten the settlement period to one day after the trade (T+1), effective from May 28, 2024.
Currently, currency trades funding securities transactions settle in two days, and investors need to adapt their methods to align with the new SEC rule. CLS is undergoing the second phase of a study initiated in the summer to assess the feasibility of allowing later submissions for next-day FX settlement without disrupting the markets. If deemed possible, the proposed change could be implemented after the SEC’s deadline.
Also Read: SEC Game-Changing Rule: Closing Loopholes That Fueled 2008 Crisis
Lisa Danino-Lewis, Chief Growth Officer at CLS, emphasized the need to ensure that all members can implement any agreed-upon changes successfully. The multilateral netting process employed by CLS requires participants to submit FX payment instructions by a predetermined time, allowing for the transfer of the net amount of combined payment obligations in each currency, reducing overall funding requirements for settlement.
Foreign asset managers, facing challenges in adjusting to the T+1 rule, sought CLS’s assistance in navigating the transition. CLS estimates that approximately $65 billion per day worth of currency transactions from asset managers could miss its deadline, considering the daily transaction volume of $7.5 trillion in the currency market, with CLS settling an average of $6.5 trillion.
The decision to potentially delay settlement instructions underscores CLS’s commitment to supporting market participants and mitigating disruptions amid regulatory changes.
Our Reader’s Queries
What is CLS in forex settlement?
CLS, or Continuous Linked Settlement, is a collaborative effort among the world’s top foreign exchange clearing banks to mitigate the risk of losing principal during the settlement of foreign exchange trades, also known as foreign exchange settlement risk. This initiative aims to provide a secure and reliable platform for foreign exchange transactions, ensuring that all parties involved are protected from potential losses.
What does CLS mean in settlement?
CLS is a global payment system that was introduced in September 2002 to settle foreign exchange transactions. Unlike traditional settlement methods, where the exchange of currencies is not synchronous, CLS ensures that the exchange is synchronized.
What is the CLS process?
CLS is a cutting-edge system that allows for seamless settlement across the world, regardless of time differences. It involves submitting instructions and receiving payments in various currencies from customers, as well as funding and settling pairs of instructions that meet specific criteria. With CLS, global settlement is made easy and efficient.
How many currencies are settled by CLS?
CLS is a reliable and autonomous multi-currency settlement system that caters to FX transactions. With the ability to manage 18 currencies, it processes an impressive one million transactions on a daily basis, amounting to over USD 6.5 trillion in value (source: CLS, H1 2022 figures).