From Herstatt to settling $6.6 trillion per day, with Marc Bayle de Jessé [Episode #18]

Podcast Intro (00:00:00) – Hello. Welcome to P.I.T. Exchange, a podcast by Currency Research. Join us as we discuss the latest in payments, innovation and technology with the industry’s most innovative thought leaders. Today’s payments are changing and moving around the world faster than ever before. In P.I.T. Exchange gives you the knowledge and insights to keep up. Sit back and relax as we join Currency Research, exchanging ideas with today’s special guest.

Jens Seidl (00:00:33) – So welcome to another episode of The P.I.T. Exchange Payments, Innovation and Technology. I’m very glad to have a great guest with us today. Marc Bayle de Jessé from CLS. Welcome, Marc.

Marc Bayle (00:00:49) – Yeah. Thank you. To bring me in into your P.I.T.

Jens Seidl (00:00:56) – Pleasure to have you. Marc, before we start, we’ve established a little, icebreaker here where I’ll start with some three lighthearted questions. First one is window or aisle on an airplane?

Marc Bayle (00:01:11) – Window. I would love to be the pilot if I could have time to. So I’m a window definitely.

Jens Seidl (00:01:17) – Okay. what do you prefer, summer or winter?

Marc Bayle (00:01:23) – I guess it’s more difficult to answer that when I love summer and swimming in the sea and, winter to do downhill skiing.

Jens Seidl (00:01:33) – That’s the right attitude. Absolutely. And the last one, your favorite musician or band or composer or music style?

Marc Bayle (00:01:43) – Well, I am a very versatile on that, so I am not a fan of a particular one. I like rock when it’s time to dance and have fun. I like classical music. New York and Privilege I am close to Lincoln Center where there is very high quality of music, jazz also it can be nice. So I like diversity also.

Jens Seidl (00:02:04) – Excellent. Not picky. Like it. All right. Thanks very much for that, Marc. Well, let’s let’s talk a little bit about what you do for work though as well. Do you want to introduce a little bit, your, your bio if you like, and what you’re doing now with CLS.

Marc Bayle (00:02:19) – Yeah. In fact, when I look back to my career, I have always worked in the field of financial marketing infrastructure, which probably is quite original. By chance I fell into it as my first job.

Marc Bayle (00:02:32) – I worked for the French Central Securities Depository at that time called [inaudible], now called Euroclear, and made my career there for a decade before moving to the European Central Bank to create the euro, to introduce a euro, to contribute to the euro up to managing the Directorate-General for Payment and Market Infrastructure. Which has been a privilege and very nice, I would say adventure, building the euro to where it is today and helping the infrastructure to reinforce itself and become really, integrated market was very nice. And, for a year and a half ago, I had the opportunity to become a CEO of CLS Bank, which is again an FMI, a designated financial market utility on the US globe. And I have the capacity to to lead this firm into the challenges that we face today. Technological challenges, innovation challenges, as the peak to peak is very much into it in the field of payments and cross-border in particular FX, settlement, which is our home.

Jens Seidl (00:03:44) – All right. Excellent. Thank you for that. And we’re going to talk a lot about some of the points that you touched on there, the challenges in the foreign exchange space.

Jens Seidl (00:03:53) – But before we do that, I have to admit I worked in foreign exchange, both with Thomas Cook and Travelex for many years and never heard about CLS because it was always at the retail end of the process and we had no appreciation of, the role that CLS is actually playing in that space and how important it is. So maybe if you could help us just give an intro to what CLS actually do, how it all started, and why it’s so critical in the foreign exchange space.

Marc Bayle (00:04:22) – Yeah. First, as a any good I would say financial market infrastructure, the fact that we are not known too much outside is good news, because it means that it works perfectly well for infrastructure. You want to hear about it because you want it to work every day. So it’s a case of CLS was created the more than 20 years ago. In 2002 exactly. It went live and was there to reduce the settlement risk. Our purpose has been under the, I would say, the strong collaboration partnership between public and private sector to establish an entity that can take away principal risk from FX, trade FX by nature, trades of inherent risks to the fact that you settle in two different currency in two different, I would say system in two different legal system, regulatory system in different time zone.

Marc Bayle (00:05:14) – And in fact, after, some, sad event in the, I would say 1974, when the state Bank house, went down in Germany, in fact, which was a very big player in the market at the time with the Deutschmark. It created a situation where they resolved their payment in Deutschmark, but the dollar never came because it was obviously in the morning, European time and when they waked up in US, it was too late to to make the payment into that because they were already down. So a series has been created with the concept that we have to resolve this risk, as the volume exchange in the foreign exchange markets is very substantial. And that’s what we are doing. So we have introduced, the first I would say payment versus payment mechanism. So you are sure that either you get your money back or you get the other currency by being your currency, but you are not exposed to principal risk. Thanks to CLS, I think partially, but, for sure, important.

Marc Bayle (00:06:17) – We are settling today 18 currencies, which is not that much if you consider there is about 200 currency out there, but that the main one exchange today in the market, those 18 currencies represent more than 80% of the volume exchange in the FX market, and also the currencies we take away that all the systemic implications that could derive from principal risk in the non settlement of transactions. So that’s really an important one today, the market makes that these 18 currencies are settling everyday on average more than 6.6 trillion US dollar equivalent. This is a pretty big, big number. It represents the large volume of exchange between the economies in the world, but also the large transactions which are being made to stabilize those currencies and have a strong market. So in this respect, CLS help to simplify the settlement of this transaction by providing, multilateral netting calculations which limit liquidity needs to less than the percent of this. So with only 60 billion US dollar equivalent, we can settle the old 6.6 trillion US dollar equivalent every day on average.

Marc Bayle (00:07:38) – So that’s what we are doing. And that’s the only thing we are doing because it’s so important that we are there everyday. So it is important that we limit our mission to exactly these type of actions, and therefore that the end user, like, Thomas, who calls us, can have indeed a reliance on the fact that the backbone of the market is operating smoothly. This is a proud of CLS to do it for more than 20, 22 years now and that we look forward to continue to develop.

Jens Seidl (00:08:10) – Lovely and, I’ve read up on, on some of the history and some of the numbers as well, and they’re just mind numbing. So you mentioned the $6.6 trillion that are settled in one day, that the global GDP is only 100 trillion. So, to put that into relation, it’s it’s a mind numbing number. And I think the total market you mentioned the 80%, of, of, currencies that you cover, with the 18 currencies that you have, I think the total market is also somewhere around 7.5 trillion.

Jens Seidl (00:08:44) – and that’s grown. I think the number of read was like 5 or 6 fold in the last 20 years. So it is such a quickly expanding market and it’s such an important market enabling global trade. You’re really at the core of that, which is, I guess both very impressive and a little bit scary as well. At least for me it would be.

Marc Bayle (00:09:04) – Yeah. I mean, yeah, I it’s a certain pride for the team. We are investing heavily in our resilience. So to be able to operate in any year with severe weather conditions to use the image, and the weather is bumpy these days. So we have to be able to have a model which can resist to the different macroeconomic challenges of this currency that we are seeing to the liquidity challenges. So that’s why the liquidity saving features that we are proposing are quite interesting for the market and quite strong and powerful in reducing risk. And the themes are smooth exchange of, goods and services across those currencies. But, yeah, I know it’s a huge responsibility, but, we are very much focused on it.

Marc Bayle (00:09:48) – So the somehow it’s a way to, also motivate our team strongly is a pride to be part of this, big, important mission, is a strong way to deliver in this context.

Jens Seidl (00:10:02) – Yeah, I can I can see that. Absolutely. And maybe before we move off, what what do you do, I think there’s one aspect as well that, I didn’t appreciate before I started talking to you, like, a few years ago when we first met, in, in New York. I was imagining to do all of that. It’s got to be a 24/7 operation, and it’s super busy throughout the whole day. While the core of the operation actually only happens in a matter of a few hours in the morning of the European timezone. Can you talk a little bit more about that?

Marc Bayle (00:10:37) – So we have to differentiate the different types of activities that we can do. So we we are taking trades almost all the time so that it’s not so much, bringing in traits. We can also match them and process them.

Marc Bayle (00:10:51) – But the settlement itself is a key where you are coming to to settle this amount that I mentioned. We have indeed a settlement window, which is relatively short. And why so very simply, Earth is round so you have to find a window in term of time where everyone is open somehow, so you can do it. And this window is a bit narrow. So, we chose somehow to, anchor ourselves on the city time early morning, which gives us that we are late in the day in the APAC region, I would say, and very early in the day, to see the listeria in Americas. And through this window of two hours, more or less, we are able to settle this huge volume of transactions by having a mechanism so in place which is directly connected to the RTGS provided by the central banks of those currencies. And that’s another strength of our services that we set out directly in central bank money, in the central bank accounts of our settlement members, which are therefore exclusively, members authorized to have such a council banks, which makes it is not that many customers.

Marc Bayle (00:12:03) – We we have, 74 settlement members, currently, if I may say so. For those 18 currencies, they are the name you would think of. So the bigger, institution, the big banks, which are themselves servicing, the one you were working for before, which are their customers and which in the back are using, those services. So we have a network of indirect participants today, connected behind our customer that we can see they are indirectly connected, which is over 35,000 of institution funds, corporates smaller. So financial institutions which are providing services and need some FX, trades to be settled safely as locals and are using the services of the settlement.

Jens Seidl (00:12:52) – And if I send that correctly so and I think it’s important when we later on talk about innovations like faster payments, CBDCs etc., that that settlement window of two hours that affords you also the opportunity to maximize your netting of, of settlements.

Marc Bayle(00:13:09) – Right. Absolutely. Yeah. It’s large transactions. There is a lot of transactions which are very, very large.

Marc Bayle (00:13:15) – I mean, in billions and the to be able to settle these other, in another way than through netting is impossible. So those transactions would not be able to take place, and therefore the market structure would not exist if you didn’t have this capacity to net those transactions. There is a lot of transactions in the 7.5 trillion US dollar you mentioned, which are pure front office I would say transactions. A lot of them also are they’re there done by, what we would call market maker or Pine Ridge activity, which are making steps of the market they never have set out, in fact, because they do trade during the day. And at the end of the day, they calculate the PNL result and there is $1 payment for the winner, basically, type of transactions. So the it is an interesting market in terms of structure and the necessity to have a big, capacity to net is very important. So you get stability of the currencies in the market. Okay.

Jens Seidl(00:14:13) – Great. Now thanks for that.

Jens Seidl (00:14:15) – It’s that’s really a good overview of of what you do. And I think it I believe it will be an eye opener for quite a lot of our listeners, that just aren’t aware of, of the extent and also the, I guess, the sophistication of the services that you offer. And it’s also interesting to understand that’s only been around for just over 20 years. Right. You mentioned Herstatt and the At Risk, which is unfortunately named after that bank, the settlement risk. That was 74. So it took a while to get there. But now it’s a very well established service with a big chunk of market share.

Marc Bayle (00:14:53) – Yeah. No. Absolutely. Well, one of the points which often is a bit, missed and we are coming to it, I guess, with innovation is, why it took so long and, why somehow, innovation may not, see things going faster. Faster has been always push forward. The main point is that the difficulty are in no way technological in this regard. There is no technology limits, which impedes to do faster or more efficient or differently the service.

Marc Bayle (00:15:23) – The main difficulty for CLS when to integrate currencies is coming from political consideration first. Second, you need to address the law and regulation. Each country has a law and regulation, which is obviously towards the national context in which they operate and not the international context. So recognition of international legs of those transactions and participant which are outside of the country are difficult to integrate. And that’s why it took quite some time to get up to 18 currency. We are still working on eventually adding new currencies in our settlement engine, but this takes time. When I joined CLS in end of 2019, we were trying to onboard the 19th currency, Chilean pesos into public information so I can share it today as I am speaking, we still can’t, make the technical connection simply because the law and the regulation is not yet in place. So you need to change the laws. You need to change a regulation to make sure that, CLS is a US operated institution with a banking status is recognized the same way as our settlement members.

Marc Bayle (00:16:37) – To be able to provide finality of settlements, that there is no risk of, questioning the result of our settlement and the enforceability of all our processes, including the netting processes we are using there, which are very important, obviously. So until we have full security on the law, on the regulation, on the political context, it is very difficult to integrate. So the technology piece is the easiest to resolve. In the end, it comes at the end and is done just by appropriate, I would say, management of projects.

Jens Seidl (00:17:12) – Absolutely but even with those 18 currencies, I think it’s very fair to say that since the inception of CLS, there have been some some major crisises affecting the foreign exchange markets, whether it was the financial crisis, starting with Lehman Brothers in 2008, or whether it was more recently Covid or now the war in Ukraine, now war in the Middle East. So there’s been I think I’ve read in one of your white papers the term of the poly crisis is, and we’ve seen that and CLS is really managed these, without any major incidents.

Marc Bayle (00:17:47) – Yeah. No, absolutely. we have a very resilient, system and, capacity to absorb, I would say, a strong variability of volume and value in our system that we test regularly. we have peaks of settlements, which can be, 2 or 3 times the normal day. We expect a big peak, by the way, in June, where there is a convergence of different events on one day, which will probably make another high record. But we don’t feel that much stress, by these, capacities to process the volume of messages we can have. So we can have, on average, we have 1.2 million transactions to settle every day. But we have capacities to handle much more. So the capacity, technological capacity is not an issue and that’s what is important in this context. So what happens in those macroeconomic or geopolitical unstable economies? On the contrary, it’s an opportunity for the FX market because it makes that the currency are adjusting those messages out there. And therefore there is a lot of activities that are taking place in the context where you have economic uncertainty because the traders are trying to take positions and adjust their portfolios and do their transactions, and therefore we setlle more in those context and are even more relevant in when there is tension in the market.

Jens Seidl (00:19:14) – Okay, good. So again, we understand with those 18 currencies, if you got the right currency pairings, you have your PvP, your payment versus payment, solution, which is the minimum risk that you can create, or that you can manage, but there’s also a chunk of, of transactions where you cannot have those pairings. and there’s a rising share of transactions from the emerging markets as well, which again, they trade in currencies often that are not included in your currency basket. But there’s also some services and some products that you offer in that space. Is that right?

Marc Bayle (00:19:54) – Yeah. So absolutely. So we are trying to to meet our purpose or purpose is to, mitigate, to the maximum systemic implication deriving from FX settlement transactions. So bringing PvP ultimate goal on all of them in central bank money. So there is no exposure to premature backline risk. And so that’s how a today we see that EM markets are developing more. We see that one of the major markets so-called EM I’m not sure EM is the right acronym anymore is China.

Marc Bayle (00:20:28) – and they have their currencies which represent now how the, the five currency exchange in the world, even eventually, on some days, probably a year. But they are in the top five, according to, surveys made by, in particular, the bids on the tri annual basis. So we see the importance of this currency, gaining pace. And we are trying to, to see whether there is solution possible, obviously, to settle those which become systemically relevant, I should say, when you go on other occurrences. Also, what is interesting to see compared to other financial products, the currencies are a bit specific. They are often with specific, I would say constraints in particular. Some of them are non deliverable outside of the country and therefore cannot be integrated in the system where you have PvP like we are doing here in CLS. So you have another two in the top 20. I would say, countries which have an active exchange. which are in this situation, India and Brazil are two of them, for instance.

Marc Bayle (00:21:30) – but so we are looking at the ways to help on those currencies until the time we can eventually integrate them in the main PvP center backbone capacity. What can we do? And we came with a product called CLS Net, which is doing, I would say everything but PvP. So it allows us to process all those transactions in a standard way. It allows the matching in the store that we provided by CLS with customers, and it allows a bilateral net calculation, for each of the participants and therefore still reduce substantially the liquidity needs in the calculation to settle the transaction. But settlement is taking place outside of CLS, so it’s done by the members themselves. So we just calculate and give them the result of our calculation based on those standard rules. So it does help them. That’s what they were doing in their back office in fact. But in a way each of the back office, the benefit for us to provide the services that is done in the standard way across the customer, so it helps them to be more efficient and, relying on the, I would say, industry service.

Marc Bayle (00:22:38) – So that’s where we are coming. This service is a relatively new in class history just for your old five year old, and therefore is still in the infancy of, I would say increasing the network. We are getting there. We have, eight of the top ten, institutions in the space which are already connected and more which are coming this year and the coming year. So it’s really increasing quite quickly. We are getting now at a level of activity, which is interesting. On average, we have more than 100,000 transactions, which is about 10% of the main service. If we compare the volume and the value also is in over 100 billion US dollar equivalent, growing as as the network effect applied, the value of usually. So each time a player comes in, you have a benefit across all of them. And so we are, increasingly in a substantially, the service we are bringing to the market. So that’s really a focus of attention we have today. We see three types of transactions on that platform.

Marc Bayle (00:23:47) – We see a part of it be about 15% one five is relating to send their activities. So activities that cannot be settled in the main settlement session because it’s a beginning of the day, as I mentioned earlier, half of the transactions are basically EM related, any of which probably more than half of the daily average is a US dollar, pair of currency, which is the most active, I would say a currency in this context. And the rest is prime brokerage activity, which, as I explained earlier, do not settle. So you see that we are trying to be as relevant as possible for the ecosystem effects settlement by covering all their needs as much as we can, and we believe that this is the right solution correctly for the market. And we will see how this all the challenges are coming.

Jens Seidl (00:24:44) – Okay. Excellent. Thank you for that. Before we move on to to some of the innovations in the payment space and how they compare to what you do, I think there’s one other, development in the pipeline where I think securities are moving from a T plus two settlement time frame to T plus one, and how is that going to impact CLS, if at all?

Marc Bayle (00:25:06) – So it’s an interesting development that we see, which is based on the concept that quicker is better.

Marc Bayle (00:25:13) – and I’ll leave it to the author of those changes to demonstrate this. So we have to to have an FX market, which is able to handle the situation, as there is a lot of operators which are giving orders to those markets from outside of the country where they settle. So within a country to go to T plus one or eventually T plus zero is relatively easy, technologically speaking at least, and it’s a matter of internally. The problem comes when we are interaction with cross-border. In the case of US, moving to T plus one, the about 20% I understand of the volume, according to the Securities Exchange Commission, are coming from outside of US. So the friction to outside is not as big as it can be in other market and has to be under. And the point being that by the time you know how many dollars you need or we get out of the settlement, it’s a bit late to, to trade this currency and to begin in series to settle it. So the money is on time.

Marc Bayle (00:26:15) – So that’s the challenge, which is the I found that, in fact, there is different, strategy that has been put in place to try to optimize the processes to limit the impact on these. And I think all has been done to get there from the various, I would say, industry players, are making well, awareness on where we are on our side and eventually changing some processes for the key actors in this market, including the one where the most active we can have, strategies to not expose themselves to those difficult, timeline if you want. So there is options which allow us to get there. What is interesting is to see that this seems to generalize. T plus one. So we think of other currencies other market moving to t plus one. And we will have to see when they come whether this create more or less challenge for Europe from a sales perspective, whether it’s a UK or EU moving to T plus one, it’s not a big challenge because as I mentioned, our time is based on CT functioning and therefore you still have time to reconcile your position and eventually find the necessary currency.

Jens Seidl (00:27:25) – Yeah, yeah, but that bit I do understand from my ethics previous career that FX was always a T plus two settlement business. Right. So now moving to T plus one is is, it’s not a tectonic shift, but it is a shift.

Marc Bayle (00:27:41) – Yeah. Not totally, but, So FX is a bit specific in this regards, I have the impression I am not a part of FX specialist, but I’m more FX settlement specialist. But the spot trade indeed are typically, on t plus two. However, I’m not seeing inputs to settle on any data. You can, trade the currency and agree with your point about when you want to settle the transaction, when you want to all over a position, when you want to do a term, next type of organization. So there is different ways to make a valuable currency where you want, where you need which which will be assessed in a way to result with the market players to see whether. Yes, indeed, the spot two plus two is still, the appropriate measure.

Marc Bayle (00:28:29) – The FX market has to be understood, by the way, in a more robust context than local context. So 1 or 2 currency moving to T plus one does not make the whole world moving to T plus one. We have to we have to understand the context is a bit different from the same war and the challenges of changing those. Those rules probably are of different nature. So the the quick reasoning that everyone should move everything to T plus one is maybe too quick an analysis to come to this conclusion. So I know there is reflection in the market, we are contributing to it and we could very well support some changes. But we have to to see how are we it will really help and not create more risk. The problem being creating operational risks where we have a very stable processes. So that’s a trade off that we have.

Jens Seidl (00:29:24) – Yes. Well then maybe let’s talk about some some other innovations in the payment space that aren’t even thinking about T plus one, but thinking about in the next second or two.

Jens Seidl (00:29:37) – So maybe I think there’s two main initiatives here. One is of course instant payments and the other is, CBDCs. And maybe let’s start with the latter, with the CBDCs. And what we’ve seen and we’ve been talking about CBDCs for many years that are conferences now, there’s been initially a big focus on retail CBDCs. Then a lot more discussion around wholesale CBDCs. And at the moment, I would say retail CBDCs has cooled down a little bit. It hasn’t stopped, but I think people are a little less excited about it and find it harder to progress than they think. Wholesale CBDCs could lead to an earlier success story or a real life application, etc. but of course, that that also comes with some challenges. And what what challenges do you see with that?

Marc Bayle (00:30:27) – so there is a lot of, different reflection which are taking place in this space, which is very interesting. So first, a lot of interest for CLS and for me to understand what are those reflection. And the primary point I am looking for is what are we solving for.

Marc Bayle (00:30:44) – So what solution are we trying to bring to what problem. And it’s not always very clear, to be fair, between [inaudible]. So there is interest in, bringing possibly, more efficient processors where processors eventually are not efficient enough. But, you need to know that first before considering where to go. The reflection of CBDC, World Sailing CCBC in particular is an interesting one, because the acronym CBDC refers to the failure to have digitalize the central bank loan area. And, yes. you know very well that since the inception of the euro, any RTGS payment from target one, target two to now, I’ve never been done in another way and in a digital way. So, and that, somehow, to my understanding, the, the way in the wholesale it works, everywhere in the world is the same. And therefore digital wholesale, is something that we know very well for decades and it works quite well. So now, wholesale CBDC refer eventually to a different technological choice, which could give eventually, more efficiency.

Marc Bayle (00:32:07) – but again, I am not sure to which degree this efficiency would be particularly stronger. So to be seen. Normally the operator of those RTGS or CLS processes are agnostic to a specific technology. We used to run, by the way, a CLS Net on the blockchain net. In the end we we moved to a more traditional, I would say, centralized technology because there were no appetite for the market towards any of the nodes which are necessary in the blockchain. They were difficult. Scalability and the resilience we need for our service could not be done with this technology. So the maturity of the technology in particular when you speak of wholesale like transaction is, I think [inaudbile] so it should be number one. You cannot take any risk. You cannot sell. I guess it will work most of the day. No, it has to work every day. And therefore you have to take technologies which are proven stable and strong. And therefore, when I see this on the wholesale, I am asking, the interlocutors to explain to me what they are looking for.

Marc Bayle (00:33:20) – What are they trying to solve for? And, yeah, so far I have not seen cases which are changing the main area that I see today, which again, are political. They are politics is agnostic to technology, legal, which is also and regulatory, which is also so the recognition and, the necessity to ensure of our central bank that the trust in the currency is maintained is, for me, paramount. And the type of technology you will take afterwards is interesting and has to be seen as a possible evolution.

Jens Seidl (00:33:55) – And it’s it’s interesting you say that because even from a technology perspective, I just had a similar conversation with Veronica, Victoria Cleland from the Bank of England recently, where they’re even experimenting with, making payments for real estate transactions directly linked to the RTGS system. So this, this argument of you need to have tokenized assets, then talking to tokenized money, they’re already building solutions to have a similar functionality without that. So it’s definitely interesting to see which way is going.

Marc Bayle (00:34:35) – Yeah. No, Victoria Cleland with Bank of England just made, their new RTGS live the just in [inaudible], and it’s based on centralized technology and they are very open minded to new technology, Bank of England, they are testing. They are one of the leader in testing different, CBDC model wholesale, retail. And so they are very open to it. But today’s the dominant technology, the one which is covert and stable and resilient is clearly, based on centralized. Absolutely. To be seen again, open minded for the future. But, we have to be proven that, this is a right choice.

Jens Seidl (00:35:14) – Yes. But then then let’s also talk a little bit about real time payments or instant payments, because again, wholesale CBDC is meant to be pretty instantaneous as well. here we also dealing with instant atomic payments, which again, that’s where we’re looping back now right to the start where we talked about this opportunity to bundle and net off, settlements. How would you do that in if everything went to an instant payment world?

Marc Bayle (00:35:45) – Yeah, absolutely. So that’s why. Yeah. When we should be careful when we say that quicker is a bit, because there, it might not be the case in the in the wholesale where the netting helps you to get a deeper market IP, and therefore the instant entity of payment for wholesale payment is more complex. It has an impact on the treasury of the banks. It has an impact on the capacity to get the appropriate liquidity at the appropriate time and place, which is much more complex. We have some experience with CLS. We have introduced this capacity already five years ago, based on the model which was used between US dollar and the Canadian dollar to obtain the settlement capacities. In the version we introduced, it was exactly that. So it’s a RTGS mode, let’s say. So real time gross settlement capacity at the atomic level. And the buy in for this type of transaction is extremely lower by the market. They are looking for a much more efficient solution, in particular, on the same day, restitution of FX settlement to be very clear up.

Marc Bayle (00:36:55) – But you could have other cases in the local case for payments. So that’s something I’m not looking at today. So in this context is interesting to see that a lot of innovation today is towards offering those type of services why the banks are looking for solution, on the contrary, which help them to, managing the best way the liquidity with some of the team at minimum bilateral meeting if not multilateral team to minimize liquidity exchange while you maximize the exchange of economic benefit between the transparency.

Jens Seidl (00:37:32) – Yeah. Okay. I’m sorry, I just realized, that we are over the normally allotted time, but that’s not a problem whatsoever. It just shows how, how interesting and and how fascinating this topic really is. I didn’t realize we’ve been talking for more than half an hour already. So, maybe before we wrap this up, what’s what’s your outlook? What do you think for the FX space are the the next big interesting developments. Where do you think, the this is it a brave new world? Are we looking into a bright future? Are you more concerned about things like cybercrime, etc.? What’s what’s your outlook on?

Marc Bayle (00:38:15) – So, we have a lot of challenges ahead of us. It’s very exciting, I would say a time to be, so we have the big challenge we just touch upon, indeed, on the emerging market currencies, which are becoming more and more relevant. And we know that in the current geopolitical context where it’s not simple to resolve it. So if we can find ways to improve the current level of, I would say reduction of settlement freeze, we would be very happy. And we are working very hard on that with my team, to try to find solution which complement what I described. So the settlement function on one end, which is the role of agents with, payment versus payment in central bank money, and the bilateral calculations that we do. So what can we do in between to help the market to be stronger? And we have some ideas, and we are trying to develop them and to see whether they can help. While eventually, the weather on the geopolitical side, clear. So that’s for sure, one challenge that we have ahead of us, which is very interesting, the other challenge is resilience.

Marc Bayle(00:39:23) – Resilience. Resilience of our service, which is our top priority. As you said, in this world, which is, not very stable. With many different crises, we need to make sure that we protect to the best way possible our system, and therefore we pay a lot of attention on our capacity to be operational every day to deliver our service. So we do look very closely to this, and therefore our investments are very much towards our resilience, our capacity to remain with the best technology. So we have really state of the art technology we are investing into. These are not only for cyber protection, but also for the capacity to process and the capacity to recover from adverse situation where we have, invested on the latest, technologies to be able to be a strong and relevant everyday. So that’s another challenge in which we are looking at, together with my team, to be, strong and relevant for the future and remain the backbone of the market that no one really knows, but know that we can rely on, like electricity and water, which are given for granted.

Jens Seidl (00:40:40) – Thank you very much for that. I didn’t expect a different answer. I know we’ve got our work cut out in this industry, and that’s exactly the same for you as well. There’s so much change happening, but that makes it exciting and interesting as well. So it’s been really great. Marc, thank you so much for your time. Really appreciate that.

Marc Bayle (00:40:57) – No, thank you Jens. It’s always a pleasure speaking with you and I hope we can meet soon.

Jens Seidl (00:41:02) – I hope so too. Thank you very much.

Podcast Outro (00:41:05) – Thank you for listening to The P.I.T. Exchange, a podcast by Currency Research. Check out our upcoming events and publications at and join us for our next episode to hear what’s trending in payments, innovation and technology.

In a recent episode of our podcast, we had the pleasure of welcoming Marc Bayle de Jessé, the CEO of CLS Bank. The conversation provided a deep dive into the critical role of CLS in the foreign exchange (FX) market, its resilience in managing crises, and the challenges and innovations in the field of cross-border FX settlement. Below is an outline of the main points discussed.

Introduction to CLS Bank and Its Importance

What is CLS Bank?

CLS Bank is a designated financial market utility that plays a pivotal role in the FX market by reducing settlement risk through a payment versus payment (PvP) mechanism. This ensures that participants are not exposed to principal risk, which is the risk of one party failing to deliver the currency after the other party has already delivered theirs.

Key Statistics

  • Currencies Settled: 18
  • Market Volume Representation: Over 80%
  • Daily Transaction Volume: 6.6 trillion US dollars

The Role of CLS in the FX Market

Reducing Settlement Risk

Marc Bayle emphasized that CLS was created over 20 years ago to address the settlement risk in FX trades. By using a PvP mechanism, CLS ensures that both sides of an FX transaction are settled simultaneously, thereby eliminating the risk that one party could default after the other has fulfilled their part of the deal.

Handling Large Transaction Volumes

One of the standout points from the conversation was the sheer volume of transactions that CLS handles daily. With 6.6 trillion US dollars in daily transactions, CLS’s infrastructure is robust and resilient, capable of managing large volumes even during periods of macroeconomic and geopolitical instability.

Challenges in Integrating New Currencies – 

Political and Regulatory Considerations

Marc highlighted that the main challenges in integrating new currencies into CLS are not technological but rather political and regulatory. Different countries have varying legal and regulatory frameworks, which can complicate the process of adding new currencies to the CLS system.

Resilience in Crisis Management – 

Systemic Risk Mitigation

Marc discussed the importance of CLS in mitigating systemic risks that arise from FX settlement transactions. During times of economic or geopolitical instability, the role of CLS becomes even more critical in ensuring the stability of the global financial system.

Development of CLS Net

To further enhance its services, CLS has developed CLS Net, a product designed to process transactions in currencies not included in the main CLS backbone. This innovation allows CLS to extend its risk mitigation benefits to a broader range of currencies.

Adapting to Industry Developments – 

Shift from T+2 to T+1 Settlement Time Frames

The conversation also touched on the industry’s shift from T+2 to T+1 settlement time frames for securities. Marc emphasized that quicker settlement times are beneficial and that CLS is adapting to these industry developments to continue providing efficient and secure settlement services.

Currency Research Payments Week in Paris

Experience a full week of insights into payments market infrastructure, policy, strategy, cross-border payments, technology, and networking. Join us as we bring together experts and thought leaders to delve into the latest trends and innovations shaping the payment landscape. Engage in in-depth tabletop discussions and networking opportunities, ensuring you leave Paris with meaningful takeaways and valuable connections. Click here to read all about the Currency Research Payments Week.


Share with your favourite platforms!

Disclaimer: While we embrace open dialogue and value diverse perspectives, it’s important to note that the views expressed by individuals in our podcast episodes are entirely their own. They may not necessarily align with the views, opinions, or positions of the organization they are associated with.