Today’s FX market is very different in its pace, the composition of its participants and its size from the mid-1990s of the Allsopp report. Today’s trading reflects more high-frequency, algorithmic trading; a wider range of financial participants, like hedge funds; and higher overall volumes. In response to those changes, CLS worked diligently with industry and the regulatory community to launch the CLS Aggregation Service (CLSAS), a joint venture between CLS and Traiana, in 2010. •  The service aggregates spot FX trades to support high-volume, low-value transactions, one of the fastest growing segments of the FX market. And in light of volume growth, CLS has also engaged its stakeholders to help them better understand their own capacity needs and to ensure that both its members and the CLS settlement service are able to manage even further growth as the FX market continues to evolve. Third, resilience in difficult times. Following the collapse of Lehman Brothers in September 2008, while market sentiment deteriorated rapidly and money and capital markets were brought to a virtual standstill, the foreign exchange market continued to function effectively. Many have attributed this to the role played by CLS. And more recently, CLS remained a reliable market infrastructure during and in the wake of Superstorm Sandy. As you know, the Superstorm disrupted this celebration, and my colleague, Sandy Krieger (no relation), who was to deliver these remarks could not make it this evening, but sends her warm regards.
Despite all that, foreign exchange market participants and central banks in 1974 found Herstatt risk to be an intractable problem. All that was left to banks was to manage it. And so it went for 20 years. Then, in the mid-1990s, Bill McDonough, president of the New York Fed, identified the continued existence of Herstatt risk as a challenge to be met. As chairman of the Committee on Payments and Settlement Systems of the G-10 Central Bank Governors, he spurred the central bank community to take a fresh look. This time, the combination of new financial analysis and the rapidly expanding availability of raw computing power made the difference. •  In what today still stands as a landmark in analysis of the connection between operational and financial risk, the 1996 Allsopp report demonstrated in a straightforward manner just how much financial risk existed in the bilateral settlement of gross principal amounts of foreign exchange – an analysis that provided the insight into how a settlement facility could reduce that risk, and into understanding how settlement management could improve in the interim. •  Raw computing power was essential for the design and risk management of any proposed new settlement facility. Through scenario analysis and stress testing, CLS’s founders could determine the necessary capital and liquidity needs, default handling procedures, and the general benefits of multilateral vs. bilateral netting. The inherently multicurrency nature of foreign exchange settlement of course enhanced the challenge.