CLS: US-Canada forex settlement due in 2010

"We have passed many of the hurdles and therefore there is reasonable confidence it will happen some time next year," he said.

CLS currently settles 75% by value of forex trades, covering 17 major currencies - this amounts to a daily average of 600,000 tickets worth $4 trillion. Daily settlement generally takes place between 7am and 9am central European time, Close explained, with the last of the cash pay-ins or payouts completed by 12pm. Settling US dollar/Canadian dollar and US dollar/Mexican peso same-day forex trades would mean opening a second session in the afternoon, which would also be a significant step towards CLS settling same-day US-European trades.

"That could be a more formidable challenge, because in order to settle them, US currency would have to be paid early in their day in order for the European payment systems to be able to close," Close continued. "There could be a liquidity cost of getting dollars in early. It's a big challenge and it will take a long time to find a way forward."

On the US dollar/Canadian dollar and US dollar/Mexican peso markets, however, Close is more optimistic. "We think we have crossed many of the hurdles. The banks seem to want to do it, which was not always the case. But post-Lehman, things have changed and they may even be prepared to incur a little liquidity cost by settling with certainty before the end of their day. It may need some support from the central banks in these markets, but it all seems to be coming together, so some time next year we could well see same-day US dollar/Canadian dollar settlement".

Many banks saw CLS's services as an unnecessary defence against a threat - settlement failure - that was "merely academic", Close said. But their views have changed since the collapse of Lehman Brothers in September last year. 

German state-owned bank KfW transferred €300 million to Lehman Brothers on the day of its collapse - and because the deal did not go through CLS, KfW did not receive its dollar payment and was unable to recover the euros.

CLS was set up in 2002 to remove this settlement risk, also known as Herstatt risk after the collapse of Herstatt Bank, which triggered a previous settlement failure in 1974.

See also: Settlement settled? 
On thin ice 
CLS for FX is 'changing the front-office'

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