Optimizing risk management in foreign exchange trading
Currency markets are currently experiencing turbulent times. This presents the counterparties in foreign exchange transactions with greater risks. How said risks can be minimized.
Foreign exchange markets are going through an agitated phase. The uncertain economic and financial situation in various countries is causing fluctuations in exchange rates. This is the case of the euro-franc rate, which is expected to see another peak from the Swiss franc perspective soon.
Funds in particular have to deal with the risks associated with foreign exchange transactions in these turbulent times. As they increasingly conduct foreign exchange trading with multiple counterparties, they are often exposed to liquidity or credit risks.
Taking advantage of the benefits of CLS
Minimizing said counterparty risk is the main objective of Continuous Linked Settlement (CLS). This enables the substantial reduction of the settlement risk when foreign exchange trading with CLS-compliant currencies such as the Swiss franc, the US dollar, the euro, or the yen. A standardized straight-through process (STP) reduces operational risk and promotes efficiency in the settlement of foreign exchange transactions. Multilateral netting also lowers costs and reduces financing requirements by more than 96% so that capital and resources can be better used. With CLS, participants not only have the opportunity to do more business with a larger number of counterparties, but also have the potential for higher trading limits.
Because of these benefits, it is not surprising that CLS has become the global standard for settling foreign exchange transactions. As it stands, some 60–70% of global foreign exchange trading is handled via this system. More than 30,000 participants actively use CLS, with funds accounting for the largest part in terms of numbers.
Responding to market changes
Credit Suisse has also been assisting its clients with onboarding in the CLS ecosystem since 2003. As a long-standing player, the bank is at the forefront of providing an open foreign exchange settlement architecture. It is committed to creating new alternatives for collaborating with its clients on foreign exchange transactions.
For this reason, the bank responded to the market changes in the funds area and developed a customized offering for this customer segment.
Approaches to strengthening the CLS service
Credit Suisse continues to focus on the seamless extension of transaction services in terms of accessibility, as well as controlling and performance, in order to monitor and control the business – for example, in terms of risk, cost efficiency, and transparency. To this end, the existing CLS offer is to be strengthened in two areas:
- API marketplace: Expansion of the service offering to include CLS API services that can be integrated into client systems upon request.
- Digital banking: Integration of a CLS dashboard and holistic view, also via capability integration in online banking.
The two approaches would allow institutional clients or their asset managers to access their inventory and transaction data when and how they want. Credit Suisse is convinced that holistic offerings and a rethinking of the most important transaction services are prerequisites for the further development and strengthening of the operating and business model for both the client and the bank.
