Some major participants in the FX derivatives market have resisted the clearing of counterparty default exposures. They correctly emphasize that, as opposed to derivatives that are settled by a payment of only the net market value of the contract, a large fraction of FX derivatives are settled when each of the two parties pays the gross amount of the currency due on its side, through a payment-versus-payment procedure at CLS Bank.
A conventional approach to clearing FX derivatives might therefore entail some special operational risks or costs. For example, if CLS were to clear counterparty default exposures and as a result be exposed to the failure of one or more clearing members, then CLS Bank might at some point become unable to complete crucial deliveries of large amounts of currencies. This could lead to a significant disruption of financial markets or international commerce. Arguably, this may suggest that CLS Bank should not provide clearing services in combination with its settlement services.
On the other hand, the claim by some market participants that FX derivatives exposures are small, thus representing little benefit from clearing, is not well supported by my preliminary review of the data on FX volatilities, gross market values of positions, volumes of derivatives trading by maturity and total outstanding notional amounts of FX derivatives.