May's market mayhem in FX settlements

June’s ECB Monthly Bulletin, released on Thursday, is turning out to be a treasure trove of enlightenment when it comes to what transpired inside the financial system in May.

We’ve already noted the critical dysfunctions the Bank observed in the money markets — which it said were comparable to the stresses experienced over the course of the Lehman collapse.

But now, we’ve come across another amazing snippet of information.

The one market that actually withstood all others in terms of stability and counterparty security during the Lehman crisis — foreign exchange — came across some very unique pressures on May 6 and 7.

That, the ECB says, was largely because its key settlement body, the CLS bank, encountered severe backlogs which ended up spooking the market.

As the Bulletin stated:

The exceptional financial market developments that occurred on 6-7 May also had an impact on CLS, the world’s largest multi-currency foreign exchange settlement system.

CLS was established in 2002 in order to eliminate settlement risk on foreign exchange trades involving different currencies. The market turmoil led to a significant increase in the foreign exchange trading instructions submitted to CLS.

On 7 May CLS settled over 1.5 million sides and settlement levels remained over 1 million until 12 May (see Chart H).

This was double the normal average daily CLS settlement volume over several days and the situation somewhat resembled that on 17 September 2008 when transactions had shot up to over 1.5 million (see Chart H). CLS coped with this situation, but the unexpectedly high volumes did have an impact both on the input process in the CLS system and on the receipt of notifications by its participants.

While days with business peaks are not unusual for CLS, especially in a currency on a business day that follows a holiday in that currency area, input levels under the stressed market conditions experienced in early May surged at times to nearly double the normal levels.

This caused occasional backlogs to occur within the CLS system itself, in Member gateways into CLS (i.e. the direct participants in CLS), or in the internal systems of a very small number of CLS Members which were processing a very high volume of activity on those days. These processing backlogs within the overall CLS environment led to uncertainty as larger than normal volumes of unmatched trades existed for a more extended period. This resulted in some concerns that there might be a more severe systemic issue, rather than merely a surge in input volumes.

And here is a comparison of the volumes seen in May 2010 with those seen in September 2008:



Which considering the stresses were focused on the euro at the time, perhaps shouldn’t be all that surprising.

We should stress also that CLS did overcome all the challenges it faced — and that there was never an actual settlement problem per se.

Furthermore, the ECB says that CLS has “taken a number of actions” to address the backlogs that emerged.

http://ftalphaville.ft.com/blog/201...et-mayhem-in-fx-settlements/?updatedcontent=1

Pretty ridiculous that FX settlements seem to be a technical problem...

 

blame it on all the piker $500 accounts with 100-1 leverage

 

of the 14 Globex currencies the 6E alone accounted for 833,803 contracts traded but
a drop in the bucket compared to the ES - 5,683,315 contracts were traded on May 6