CLS Bank the worlds largest clearing house for OTC FX transactions is testing its processors and system incase the Euro is divided.The tests form the first solid sign that the currencies-trading industry is preparing for the worst from the common currency area’s deepening debt crisis.
The New York-based industry utility, which ensures that each side of currencies trades gets paid, is keen to ensure that its systems are well equipped to cope with disruptive “Lehman-type” events and could withstand the stress of a country leaving the euro zone, these people familiar with the matter said. One of the people added that getting new European currencies up and running in the system would take “at least a year”.
CLS is owned primarily by the 63 member banks that use it to settle around 70% of trades in 17 currencies. The facility is under rigorous central bank scrutiny, with the main supervisor being the New York Federal Reserve and a coalition of 23 central banks around the globe. Central banks encourage the use of CLS to settle trades, in an effort to reduce counterparty risks, but participation is voluntary.
The fact that CLS is preparing for a potentially extreme shock in foreign-exchange markets signals a shift in sentiment in recent weeks, with some banks stepping up warnings to clients to prepare for a country exiting the European monetary union.
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Japanese bank Nomura said Friday that a euro breakup is a “very real risk” and cautioned that investors should check the small print on their euro-denominated bonds, because legal technicalities could determine whether these assets stay in euros or switch into legacy currencies, such as the Greek drachma.
At least some of the banks that use CLS are making similar plans. “We always plan for contingencies,” said a senior executive at one of the largest currencies-dealing banks, speaking on condition of anonymity.
“The bulk of what we’ve done is just making sure that we’re prepared for adding new currencies. We are often prepared to trade new currencies in emerging markets and other locations around the world. So our systems are reasonably flexible,” he added.
The break up of the Euro will have mixed implications, its position as a reserve currency will be in question as investors will have doubts that if Euro members have economic problems then they will be ousted.