CLS Group (CLS), a provider of risk mitigation and operational services for the foreign exchange market, today announced that HSBC Korea was approved as a third-party service provider, allowing fund managers to access the CLS system in South Korea for the first time.
The ability of Korean institutions to settle via CLS adds another level of control to their trading process while ensuring the effective mitigation of FX settlement risk. This should allow a greater capacity to trade as a result of reduced counterparty credit risk and through the introduction of more automated processes and streamlined trading operations.
Samsung Securities was the first non-bank financial institutions (NBFIs) to gain third-party access to CLS which was an important milestone for both CLS and the South Korean FX market. The Korean central bank announced back in 2014 new rules to expand the range of FX transactions eligible for CLS payment-versus-payment settlement to include those of NBFIs. This was in large part due to CLS’s efforts with the country’s regulator and local FX market players to provide further mitigation of settlement risk in the country.
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According to CLS data, third-party participation has made more than 20% of the total value settled in CLS system whilst the number of service providers in the Asia Pacific region saw double-digit growth last year.
The Korean FX market has evolved significantly in recent years. The South Korean won currently accounts for 1.2% of daily FX turnover globally while the country itself is currently ranked the sixth largest economy in the world.
Rachael Hoey, Head of Asia at CLS, commented: “Expansion of third-party participation by NBFIs is a key part of our strategy to mitigate settlement risk, underpin financial stability and improve trading efficiencies for the global currency market. The growth in fund manager participation in CLS reflects the importance of the buy side in the FX market. We expect NBFIs who join CLS to benefit on multiple levels. These include more automated processes and streamlined trading operations, as well as liquidity benefits from netting that lower transaction costs while boosting trading and counterparty limit management efficiencies that support business growth opportunities. All of these are important during normal operations but particularly critical during periods of stress or volatility.”
Soon Hyok An, the Head of Trustee & Custodian Services at HSBC Korea, added: “HSBC Korea successfully facilitated Korea’s first international fund management institution to join CLS in Seoul, Korea. The ability for fund management institutions to settle FX trades via CLS brings Korea in line with other leading financial centers around the world. Effective mitigation of settlement risk is an increasingly important part of an investment manager’s fiduciary duties, with which HSBC Korea and our global and local custodians must comply to secure our client assets. With growing global investment and foreign asset allocation taking place, HSBC Korea is expecting to work with other clients to use CLS in Korea to reduce FX settlement risk and strengthen Korea’s position as a regional trading hub.”