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Regulators are investigating whether traders are exploiting cumulative market power- Alexander Filsche

The FX market continues to be the most dynamic, vibrant and liquid market in the world. Asia has leveraged
upon this trend to emerge as the most active trading region. Centress like Singapore have seen trading
volumes nearly double to $383 billion from 2010. Indeed, the increasing importance of Asian currencies like
the RMB continue to facilitate intra-regional investment as trade flows between Asia and other global hubs
continue to grow and develop. That has provided a wealth of opportunities to companies like CLS to expand
their services.
CLS specialises in mitigation of settlement risk- risk that one party carries by paying the currency it sold but
has not received the currency it bought for, resulting in a loss of principal. Companies like CLS mitigate
settlement risk through the provision of its payment settlement service, which has direct links to real time
gross settlement systems of the currencies it settles. CLS has also contributed to the safety and stability of
the FX space by providing liquidity efficiency.
CLS has benefited from rising client volume to amass their number of counterparties to match and net
transactions within their system, therefore allowing individual banks to meet their daily net transactions.
Indeed, CLS has invested heavily in their infrastructure and technology so as to receive instructions, conduct
the matching process and provide their settlement services.
Close to 70% of total FX transactions are executed electronically, a large contrast to a time where it was
previously dominated by a dealing-desk environment. Mr Filsche observed that this offers more competitive
spreads, better execution quality for clients and more transparency in the system. Drawing from the
European experience, he added, Regulators are investigating whether traders are exploiting cumulative
market power to manipulate price in their favour- resulting in higher costs for simple transactions for clients
such as pension funds. Narrowed spreads may have also encouraged traders to seek underhanded means to
cut their risks.
The adoption of e-FX is expected to only grow in response to the on-going investigations into irregularities
around currency benchmarks such as the London Fix.
A recent challenge for CLS is to develop a higher level of financial market infrastructure. The company needs
to adopt higher capital standards, increased levels of redundancy and risk management within their systems
and improved governance control processes for their organisation. New skills and capabilities in risk
management, compliance, internal audit and finance must be brought in as well.
One of the recent challenges CLS faced was the need to raise capital for the overhaul of their proprietary
technology and development of new products and services. CLS has raised $270 million (GBP160 million) to
continue investing in their business. That has also given them additional regulatory capital to abide by new
standards that are relevant for infrastructure. It also allowed for a stronger balance sheet to leverage upon
various opportunities in the region. CLS recently opened a new office in Hong Kong in 2013 to facilitate the
addition of the Chinese Reminbi and Russian Ruble to its repertoire of 17 currencies.
In deciding which currency pairs to expand to, CLS assesses several factors that include customer demand,
change in trading patterns and flows between jurisdictions prior to making its decision. Ultimately, it still
depends on individual governments policy mandates that dictate eligibility for companies like CLS to further
their settlement business.