CLS impact 'neutral' for RTGS systems

The introduction of the continuous-linked settlement service (CLS) for foreign exchange has had little effect on flows and liquidity on real-time gross settlement systems (RTGS), according to the latest Bank of England (BoE) quarterly bulletin.

CLS settlement members’ ability to fund their gross obligations on a net basis was expected to reduce settlement flows in CLS currencies and improve liquidity. Conversely, although the potential benefits of CLS were widely recognised, market participants feared the need to make payments on a strict timetable would complicate treasurers’ intra-day cash management.

However, according to the UK central bank report, released on September 26, neither effect has been observable in the majority of currencies on CLS.

The BoE found there has been little impact on the flows through Chaps (the UK clearing house automated payment system) for sterling. This can be explained by a number of factors, according to the report. Before the launch of CLS, many CLS settlement members were members of bilateral netting systems, such as FXnet. The impact of the shift from bilateral to multilateral netting in terms of gross flows may therefore have been less marked than first expected, said the BoE.

There may also have been an increase in the volume and value of forex trading in both CLS and non-CLS currencies in the market in general. Also, CLS has introduced a new tiering system into FX settlement - CLS settlement members provide settlement services to third-party clients, so additional payment legs are often added, said the BoE. Furthermore, not all settlement members have yet extended the use of CLS settlement to all their branches so the effects may be limited, it added.

The euro and dollar high-value payment systems have also shown little sign of being affected by CLS, said the report.

According to the BoE, the only currency to be affected is the yen. The Japanese yen clearing system, dedicated to clearing yen payments arising from cross-border transactions, has seen a material reduction in values and volumes, it said. It is not clear why CLS’s impact on yen flows should apparently differ from its effect on other currencies, it added.

CLS has also not had any obvious detrimental effect on banks’ intra-day sterling cash management since launch, said the BoE, although some officials have noted that tighter controls are now necessary depending on the size of the bank and its reserves. "There has been little or no increase in collateral posted to raise intraday liquidity in Chaps sterling since CLS’s introduction and disruptions to CLS arising from late or failed pay-ins have been rare," said the BoE report.