CLS Group, the plumbing behind the currencies market that ensures each side of trades gets paid, is set to put its stamp of approval on blockchain-type technology with a new netting service covering currencies it does not settle.
The industry utility, which is revealing its plans at the Sibos event today, says the new service will allow users to net currencies trades for payment, even if those currencies have not been through the lengthy process of becoming one of its 18 ‘full’ CLS currencies. This will include the Russian rouble and the offshore Chinese remninbi – two heavily-traded currencies with challenging legal frameworks that make it tricky to add them to the core settlement system.
Non-CLS currencies are netted and settled bilaterally. The new initiative is designed to bring some standardisation to those bilateral processes.
The move is something of a departure for CLS, which typically handles currencies and products only with the full backing of their respective central banks and after intense legal and regulatory scrutiny.
“We want to be the leading provider of risk mitigation services,” said Alan Marquard, chief strategy officer. “If we can help banks net down exposures, even if it’s not inside CLS, then that’s an advantage.”
The project is the utility’s first step into distributed ledger technology. Mr Marquard said it’s too soon to use that technology for such a structurally important task as its core settlement, which involves laborious testing and resilience. But using it for netting outside of that central system “is a way for the market to get comfortable with distributed ledger technology” with CLS’s seal of approval, he said.
CLS’s core function is in settling trades between counterparties simultaneously, removing the risk of one side being out of pocket in a gap waiting for the other side to send funds. It has more than 60 members. Fourteen banks and investors have signed up to the new netting service, including Citi, JP Morgan, Morgan Stanley and Goldman Sachs Asset Management.