Treatment of FX transactions settled via central settlement counterparties i.e. CLS (The Continuous Linked Settlement foreign exchange settlement system)

Can CLS (as a central settlement counterparty) be treated as a counterparty when netting FX transactions according to Article 21 of the Delegated Regulation (EU) 2015/61?

LCR as a metric aims to capture liquidity risk by consolidating expected future cash flows in relation to liquid assets during a stressed scenario. CLS (The Continuous Linked Settlement foreign exchange settlement system) is an international payment system for the settlement of foreign exchange transactions, which has been developed and implemented in a close and ongoing dialogue with the central banks of the currencies involved. CLS main purpose is to eliminate settlement risk and they act as a central FMI in which all participants trades settle. Since CLS has information about all participants transactions they are able to calculate the net position per currency and member per day. As a consequence, only the balances of the netted claims and liabilities, i.e. participants’ respective net positions, are transferred to or from the system (net funding). Participants’ liquidity requirements are significantly reduced in this way. Because of the multilateral netting procedure used, the payment flows actually transferred between participants only amount to a fraction of the gross amounts actually settled. Therefore, it could be argued that in terms of liquidity risk originating from foreign exchange transaction cash flows, CLS should be considered a ‘counterparty’ for the purpose of Article 21 of the Delegated Regulation (EU) 2015/61, since the multilateral netting procedure, most accurately captures the expected cash flows in each currency.