To net or not to net? That's CLS's question

A quick poll on fxweek.com found 83.7% of 325 respondents want the settlement platform to offer a netting service. Given the majority of the top 10 banks in CLS do not want pre-settlement netting at this stage, clearly those of you who do are trying to make yourselves heard.

The fact that most of the major players on CLS have said no to netting in itself demonstrates why the settlement platform has been unable to reach a decision on the matter. And there's a number of reasons why these major players feel the way they do.

Among them is a possible misconception that if you net you will end up saving, and of course, in many cases the point is aimed at CLS charges. Jonathan Butterfield, New York-based executive vice-president of marketing and communication at CLS says the nay-sayers believe netting doesn't necessarily mean cost savings.

"If you are going to net effectively, which makes it legally binding, you still have to be able to reconcile and ensure that you are in control. That is, to ensure the net amount that you will now exchange with the counterparty is indeed the right number for that day for that pair," he said. "It's more work."

The risk there is you end up spending your money in a different way and therefore don't necessarily save anything. And according to Butterfield, a lot of banks like the cleanliness, security and scalability of the gross model.

Additionally, according to research by CLS, the effects of netting are extremely uneven, which counters the assumption that netting provides a consistent result. "The market-place has changed and it's fragmented in ways that make netting effectiveness move around quite significantly," said Butterfield. "When we model it, the effectiveness is also unequally distributed across the industry. So you get a winning group and a losing group, and within that you get winning and losing days. So the total prize of netting is not that easy to estimate."

Butterfield said going forward there is the potential for CLS to introduce netting. "Part of our challenge is how we navigate through the turbulence of an industry with quite polarised views, which has an impact on our models," he said. "The model was agreed gross and if you want to change the game you have to figure out how to transition. That's something we need to do with our owners, it cannot just be done by CLS."

Saima Farooqi, Editor