%0 Journal Article %A Patrick Lefler %T CLS and Bilateral Netting: Between a Rock and a Hard Place %D 2008 %R 10.3905/JOT.2009.4.1.044 %J The Journal of Trading %P 44-47 %V 4 %N 1 %X With the subprime mortgage and credit crisis taking up everyone’s attention, foreign exchange settlement risk has taken a back seat in both the headlines and the focus of financial market participants. There have been no major meltdowns, no spectacular headlines, and no significant write-offs due to settlement risk issues. In fact, it’s been decades since the last major FX settlement risk incident occurred. Nonetheless, these are interesting times for the large global banks that dominate the FX trade flows and for CLS Bank International, the special-purpose bank that has been responsible for settling the vast majority of FX trades since it began operations in 2002. CLS has eliminated the settlement risk for nearly 60% of all FX trades that are currently settled worldwide, and it supports the top 15 trading currencies—very impressive numbers for an organization that has been in business for less than six years.There is, however, one issue that could derail the remarkable progress made by CLS over the years: how to deal with the increased pressure from its member banks to accept bilaterally netted FX trades. CLS and its member banks do not currently accept the payment messages from bilateral netted trades; they only accept the individual trade tickets. However, as the market continues to develop, there is a divergence between the participants in the FX market who want delivery of the currencies they have bought and those who don’t.This article examines the challenge faced by global banks to counteract FX settlement risk, and the new pressure to provide extreme capacity at minimal cost. The article provides an overview of what FX settlement risk is and where CLS and bilateral netting fit in. The author concludes by positing that a more fundamental review of the entire post-trade processing chain, up to and including settlement, needs to be undertaken.TOPICS: Exchanges/markets/clearinghouses, analysis of individual factors/risk premia, currency %U https://jot.pm-research.com/content/iijtrade/4/1/44.full.pdf