CLS to Develop Payment Netting Service Using Distributed-Ledger Technology

David Puth, CEO of CLS, tells WatersTechnology that the netting service will be open to buy-side and sell-side institutions across the FX market, including banks, broker-dealers, asset managers, hedge funds and corporations.

CLS is aiming to launch the service in 12 to 18 months, as it will be subjected to regulatory approvals and market readiness.

It will also be introduced in two phases. The first phase will deliver a payment netting service for FX spot, forwards, non-deliverable forwards (NDFs), swaps, tomorrow/next day and same-day trades across the 18 currencies CLS currently settles, as well as the Chinese renminbi (offshore), Russian ruble, Polish zloty, Turkish lira, Thai baht and Czech koruna.

Following the delivery of phase one, CLS will expand the service to include more currencies and attributes.

"Participants will be able to submit FX instructions for six products and 24 currencies, over existing Swift-based channels," Puth says. "We will also give participants the option of connecting via a highly secure, permissioned distributed ledger."

The service will match FX instructions based on the same principles as CLS' core service. Then, it will send a match notification to each counterparty, which will be used as a legal confirmation of the trade.

"Participants will assign a cut-off time for each currency," Puth explains. "Limiting the cut-off times introduces market standardization while providing sufficient flexibility to accommodate the different operational support models of FX market participants."

Right after each cut-off time, CLS Netting will issue a netting report providing the net obligation by currency to the participant. Delivery of net payment amounts will be managed outside of the service through local currency correspondent banks.

Built on Blockchain

Being one of the founding members of the Linux Foundation Hyperledger Project, CLS decided to build the entire service with distributed-ledger technology.

"It is crucial that the basic fabric of any distributed ledger technology we use for the CLS Netting platform adheres to high standards and resilience," says Puth. "We will incorporate DLT capabilities in a way that is meaningful to our members and participants, and we believe it has enormous potential."

Matching and payment netting will be conducted in a cryptographic way using the distributed-ledger technology, which removes the potential for single points of failure, thus improving operational resiliency and security.

CLS will build the DLT platform using Hyperledger Fabric, an open-source solution led by IBM. Puth says the involvement of IBM will help ensure that the platform meets the requirements necessary for delivering a resilient, secure, and scalable service.

"IBM is a key member of the Hyperledger Project and has been a partner of CLS since our inception," says Puth. "Our partnership creates the foundation for new technology that can be applied not only to CLS, but more broadly across the financial industry."