#21: Rethinking FX Settlement Cycles

26 Mar

3rd April 2025

With:

| Emanuel Vila (CLS)

In Session #21, Emanuel Vila (Director of Corporate Strategy & Innovation, CLS) joins FNA to discuss the findings of a landmark joint study: "Reimagining same-day FX: Exploring the case for additional settlement cycles." Using a simulation of the CLS system—which settles $7 trillion daily—the research quantifies a critical but often overlooked reality: the more frequently you settle, the less you can net.

The study reveals that while adding cycles later in the day could bring a portion of the $500 billion same-day FX market under PvP protection, it comes at a high cost. For instance, moving to three cycles per day would increase liquidity requirements by nearly $48 billion. This session provides the empirical data needed to move beyond the hype of "instant" payments and toward a model of "smart" settlement that balances systemic risk reduction with global liquidity constraints.

Key Discussion Points:

The Netting Efficiency Trap: Why increasing the number of daily settlement cycles reduces the time for offsetting flows to accumulate, forcing banks to fund more of their obligations in gross terms.
T+0 Market Potential: Identifying the opportunity to capture same-day FX volumes—currently settled bilaterally and without PvP protection—into a secured environment.
The Liquidity Delta: Analyzing the specific funding increases (ranging from $16.9B to $48B) required for participants under various multi-cycle scenarios.
Operational Feasibility: Why the study suggests that more than three cycles per day may be unmanageable for the global operational infrastructure.
G20 Roadmap Alignment: How additional CLS cycles could help meet global targets for faster, cheaper, and more transparent cross-border payments.
The "Digital Twin" Methodology: How agent-based simulation allows CLS to "test-drive" systemic changes without risking $7 trillion in daily value.

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