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Currency settlement mechanism strengthens Korea’s financial system

David Puth, Chief Executive Officer at CLS, welcomes the Bank of Korea’s call to expand protection from settlement risk in foreign exchange and highlights the efficiency and operational benefits of CLS to non bank financial institutions.

March 30, 2016 | David Puth

Mitigating risk in the midst of uncertainty

Managing cash flow, maintaining adequate intraday liquidity, and fulfilling payment obligations can be challenging for asset managers, securities companies, and funds given the scale of diversification that has evolved. In some cases, additional funding for settlement can be required to satisfy demand during volatile market conditions, putting further pressure on counterparty risk limits.

To avoid this and ensure protection against counterparty risk, it is crucial that the best risk management practices are embedded within currency trading organisations. This includes, among other things, settlement risk. 

Settlement risk is the risk of one party to a foreign exchange (FX) transaction delivering the currency it sold but failing to receive the currency it bought from its counterparty. The result in such an event is a loss of the principal, often many millions of dollars.

The FX market’s position is unique in underpinning the stability of businesses and international trade. The uninterrupted operation of this $5.3 trillion a day market is of a critical nature and one that stretches far beyond the trading floors of the largest international banks.

Pursuing financial stability in the Asia Pacific region

As the largest risk mitigation and settlement system for currency trading, the role of CLS is to maintain stable and orderly settlement between the thousands of counterparties trading currencies across borders every day, and protect against settlement risk.

The CLS has a long and deep history with the Asia Pacific (APAC) region. CLS currently settles six APAC currencies and the KRW has been a CLS-eligible currency since 2004. CLS currently has a strong pipeline of interest from a wide range of institutions, including securities companies and fund managers.

The FX market in the region including Korea has evolved as a result of...

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Government Finance, Markets & Exchanges, Risk and Regulation

Keywords:Foreign Exchange, FX Settlement, Nonbank, CLS, Currency Risk