The huffing and puffing about whether or not CLS should accept pre-netted trades continues. This week, I was sent a white paper by Wallstreet Systems, Optimizing settlement risk management: CLS and beyond, that highlighted several issues.
“CLS has some disadvantages. Membership fees are high, and the service is relatively expensive on a cost-per-trade basis. Lowering this cost-per-trade remains a high priority for many CLS users... Furthermore, banks face capacity issues because the volume of tickets being processed is rising faster than the total notional dollars being traded. Additionally, the high cost of processing these trade tickets is having a negative effect on margins. As trade volumes continue their steady increase, it has never been more important for banks to develop a flexible, adaptable trade-processing infrastructure that will help them to reap the greatest profit from their FX trading activity,” the paper stated.
However, it added: “With its endorsement by the G10 central banks, CLS will continue to maintain a significant role in the settlement process.” And that is arguably the key point. The regulators are unlikely to allow anything that puts CLS’s survival in jeopardy and most of its members and users realize this.
Netting will have a serious impact on CLS’s revenues. Unless banks agree to pay a fixed fee to cover CLS’s costs, it is difficult to see how netting will ever be accepted by the wider industry.