Daniel Mminele: Ten years of inclusion of the South African rand in the
CLS
Remarks by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
Continuous Linked Settlement (CLS) Reception to mark ten years of inclusion of the South
African rand in the CLS, Johannesburg, 17 March 2015.
* * *
Good evening, ladies and gentlemen.
It is an honour for me to make a few remarks on this occasion of the CLS Reception to mark
ten years of settlement of the rand in the CLS system.
I am particularly pleased that the CLS delegation to mark this key milestone is led by none
other than the Chairman of the CLS Board, Mr Kenneth Harvey. We welcome you and your
colleagues to South Africa, and thank you for coming all the way.
The CLS is one of those mission-critical systems that can be compared to the plumbing
system of a building. Just as most of us never think about the plumbing of a building and take
for granted that it is there and works, the CLS also runs very much in the background of the
foreign-exchange market. It is only when there is a leak or a pipe bursts that we realise how
important plumbing is. In the context of the CLS, if a big pipe bursts and cannot be fixed
quickly, this can result in major disruptions to the foreign-exchange market, with potential
rapid spill-over effects to the rest of the financial system, which at worst could bring about
financial instability on a global scale.
As many of you will know, the CLS plays a fundamental role in the foreign-exchange market,
where it operates the largest multi-currency cash settlement system to mitigate settlement
risk for the foreign-exchange transactions of its members and their customers. In its offering,
the CLS mitigates settlement risk through the provision of its unique
payment-versuspayment settlement service which has direct links to the real-time gross settlement (RTGS)
systems of the currencies it settles. In addition to mitigating settlement risk, the CLS also
contributes to streamlining and standardising foreign-exchange operations, helping to reduce
costs.
A foreign-exchange settlement usually requires potentially large cash funding liquidity to
settle the obligations of settlement members. These values are materially reduced in the CLS
system through the multilateral netting of the obligations between member banks to deliver
best-in-class liquidity management. As regulatory requirements for larger liquidity buffers
increase, the benefits from multilateral netting at an industry level have become increasingly
important.
Before I briefly share with you how our participation in the CLS has grown over the years,
allow me to go down memory lane for a short while.
Foreign-exchange settlement risk - being the risk that originates from a situation where, in a
foreign-exchange trade, one party has irrevocably paid a currency and the counterparty
subsequently fails to meet its side of the deal by not delivering the other currency on time -
captured the attention of regulators as a major source of systemic risk following the
spectacular collapse of Bankhaus Herstatt in Germany in 1974. The creation of the CLS
goes back to regulatory concerns around the collapse of Bankhaus Herstatt.
In March 1996, the Committee on Payment and Settlement Systems (CPSS) at the Bank for
International Settlements (BIS) published the so-called Allsopp Report titled Settlement risk
in foreign-exchange transactions - a strategy for addressing foreign-exchange settlement
risk. This report called for action from the private sector to address settlement risk in the
foreign-exchange market. The response of the private sector led to the establishment of the
CLS and the launch of the CLS system with 39 members and seven currencies: the
Australian dollar, Canadian dollar, euro, Japanese yen, Swiss franc, UK pound sterling, and
US dollar in September 2002.
Since then, the system has evolved to the current state where foreign-exchange transactions
in 17 currencies are settled with a peak volume to date of over 2 million transactions per day
and a peak value of more than US$10 trillion per day. In its evolution, the CLS added four
more currencies in September 2003: the Danish krone, Norwegian krone, Singapore dollar,
and Swedish krona. In December 2004, a further four currencies were added to the
settlement service, namely the Hong Kong dollar, Korean won, New Zealand dollar, and
South African rand. The currencies of Israel and Mexico were implemented on the system in
2008.
Joining the CLS in 2004 was a major achievement for South Africa given the stringent
eligibility criteria. In briefing Parliament at the time about the risk management, liquidity, and
efficiency benefits of the CLS system, then Minister of Finance, Mr Trevor Manuel, put it
rather succinctly, and I quote: "The inclusion (...) demonstrates that the South African
payment system provides for global best practice, and would foster domestic and
international investor confidence in the integrity and robustness of the national payment
system."
Back in December 2004, our central bank joined the CLS Cooperative Oversight
arrangement led by the Federal Reserve Bank of New York, as the regulator of the CLS
Bank, in order to ensure that, in the settlement of the rand in the CLS system, our domestic
policy objectives continued to be met.
We also joined the CLS Operators Forum, also led by the Federal Reserve Bank of New
York, to ensure the coordination of relevant actions by all real-time gross settlement system
operators that are linked to the CLS system. In all these cooperative arrangements, there is
an appreciation of regular interaction as well as frank and constructive engagement with CLS
management and executives.
Before I conclude, let me share some information on our participation in the CLS system. In
2004, when we joined the system, two of our banks, namely Absa and Standard Bank,
became settlement members. These banks had obtained direct access to the CLS system in
terms of submitting their foreign-exchange trades. Absa has, however, since become a
member of the Barclays Group and its membership has thus been terminated. It is now a
submitting branch of Barclays in the CLS system. At the time, we had six Rand Nostro
service providers, namely Absa, Calyon, CITI, FirstRand Bank, Nedbank, and Standard
Bank. These banks provide services to CLS members in terms of either receiving rands that
are purchased and settled through the CLS system or funding rands that are sold and settled
through the CLS system. In terms of rand settlement members, they are in a position to
receive and fund rands for their own account.
As far as rand settlement in the CLS system is concerned, during 2005, an average of
R83 billion worth of rand trades were settled in the CLS system on a daily basis. To settle
these trades, the average daily liquidity requirement that needed to be paid into the CLS
system through the SAMOS system amounted to only R6,2 billion. This resulted in a liquidity
efficiency of 7,5 per cent. By 2009, the average values of rand trades that were settled in the
CLS system on a daily basis had grown to R163 billion. To settle these trades, the average
daily liquidity requirement that needed to be paid into the CLS system through the SAMOS
system amounted to only R9 billion. This resulted in a liquidity efficiency of 5,5 per cent.
More recently, during 2014, the average values of rand trades that were settled in the CLS
system on a daily basis amounted to R411 billion. To settle these trades, the average daily
liquidity requirement that needed to be paid into the CLS system through the SAMOS system
amounted to only R8.7 billion. This resulted in a liquidity efficiency of 2,1 per cent.
Thus, in the ten years of South African participation in the CLS, the average daily value of
transactions settled has increased fivefold, with only a 40 per cent increase in pay-in values.
From these statistics it is evident that while our market is benefiting from the risk
management mechanism provided by the CLS system, there are also huge benefits that we
gain from the liquidity efficiency.
Among the many things highlighted by the global financial crisis was the realisation that there
are certain critical, systemically important systems in the international payment and
settlement environment which deserve special attention going forward. The CLS is one of
them, and in this vein we in South Africa remain committed to building on our good
relationship with the CLS and other fellow regulators as well as relevant international bodies,
such as the Committee on Payments and Market Infrastructures (CPMI), to ensure the we
continue to strengthen the system further so as to reduce the potential for systemic
disruption and financial instability.
As you may be aware, we are also actively engaged in implementing cross- border
settlement arrangements and systems within the Southern African Development Community
(SADC), and our experiences from working with the CLS are proving quite useful.
To our stakeholders in the South African national payment system, the CLS Group, and, last
but not least, my colleagues at the South African Reserve Bank and other regulators, all the
best for the next ten years and more!