Early platform to help strengthen liquidity, efficiency and reduce intraday liquidity risk
The first application for the global FX market running on blockchain became operational, with Goldman Sachs and Morgan Stanley among its eight initial users.
CLS operator, which is around $ 5 trillion per day, hopes that the system, CLSNet, will optimize intraday liquidity, improve operational efficiency and reduce settlement risk.
As reported for the first time by Computer Business Review, the FX settlement company worked closely with IBM to develop the payment clearing system, based on IBM's DLT (Hyperedger Fabric Ledger) technology.
(Compensation involves clearing the value of multiple positions held between two or more parties, for example to take into account the currency volatility caused by the time zone difference.It can be used to determine what part of the remuneration is payable in a multiparty agreement, the disputes on which to bind annual amounts of capital.)
Marie Wieck, head of IBM's blockchain, described the launch as a "testament to the maturity of blockchain technology and the value it can offer in practice".
Launch of CLSNet: eight first users enter live
Six other participants from North America, Europe and Asia, including Bank of China (Hong Kong), are committed to joining the service, with a constant approach of many other market participants planned for the next months, CLS said Wednesday.
Alan Marquard, Chief Strategy and Development Officer, CLS, said: "A standardized and automated payment compensation process will lead to better intraday liquidity, lower costs, better operational efficiencies and ultimately support business growth."
He previously refused to answer questions about volumes managed through the system, stating that they would gradually increase as CLS monitored functionality in a real environment.
Currently, the lack of standardization and automation introduces risks and operational inefficiencies for market operators, the company said.
"While a large number of participants are currently net of one with the other on a regular basis, these processes often have manual intervention and are not fully standardized or scalable. limited is exacerbated by the high liquidation costs associated with emerging market currencies, despite their greater relevance to FX market participants, "added CLS.
Many FX market participants do not make net payments in relation to FX trades, instead choosing to settle on a gross basis.
These gross payments have full exposure to settlement risk, resulting in higher intra-day liquidity demands and leading institutions to hold more capital. CLS works with technology in the hope of mitigating these risks.
The Bank of China (Hong Kong), GM Barry Lo, said: "CLSNet [will]… improve operational efficiency in trade and clearing payments for non-CLS currencies regulated as CNH and strengthen our risk management. This underlines our strong commitment to drive Fintech innovation and represents an important step forward in the application of the new technology in our companies ".