RESUMEN RESULTADOS Tabla 1 Resumen resultados observatorio

Each Settlement Member is exposed to the credit risk of CLS Bank with respect to the long positions in its Account. This risk is mitigated by the duration of the funding period, which is five hours, and the efficiency of the Pay-In and Pay-Out algorithms. (See Section 3.3.2 below.) 3.2.2 Exposure to Other Members (General Discussion)

As discussed above in Section 2.2.5, a continued failure by a Settlement Member to satisfy its funding requirements, coupled with significant FX market movements in excess of the currency haircuts applied to the Accounts, could result in an FX market loss for CLS Bank and could affect the ability of CLS Bank to satisfy its Pay-Out obligations to the non-failing Settlement Members. Because the CLS Bank Rules require a mandatory assessment of these FX market losses to the Settlement Members through a loss sharing procedure, the credit risk of the non-paying Settlement Member is ultimately borne by the other Settlement Members.

The CLS Bank Rules require that this FX market loss be allocated as a “combined loss allocation” to the Settlement Members which, on the date of such failure, had settled payment instructions with the non-paying Settlement Member. The combined loss allocation assessed against a Settlement Member is an amount equal to the sum of all Account credits and debits attributable to settled instructions with the non-paying Settlement Member (but such sum may not be less than zero (0)). Assessing the combined loss allocation in this manner, without any cap, incentivizes each Settlement Member to evaluate its credit risk with respect to each of its counterparty Settlement Members, and if appropriate control such exposure by limiting its settlement activity with one or more counterparties. The CLS Bank Rules also provide for additional loss allocations (general loss allocations), which are capped. For example, Settlement

Members are exposed to a potential general loss allocation if one or more Settlement Members fail to satisfy their respective combined loss allocations.

CLS Bank believes, however, that the risk of potential combined and general loss allocations to Settlement Members is mitigated by the haircut methodology and risk management tests, and most significantly by CLS Bank’s management of credit risk to the Settlement Members through initial and continuing financial requirements for membership (see Section 3.1.1 above). The membership criteria are designed to minimize the risk of disruptions to the Settlement Service due to Pay-In failures or operational problems, by limiting membership to those institutions that have the financial and operational capabilities to satisfy their obligations to CLS Bank. In particular: (i) Settlement Members must meet specific financial, credit and operational criteria to qualify for initial and continuing membership in CLS Bank; (ii) CLS Bank sets an Aggregate Short Position Limit for each Settlement Member, which has the effect of capping the magnitude of any loss allocation that could be assessed as a result of the continued failure by that Settlement Member to satisfy its funding requirements (even assuming significant FX market movements in excess of the currency haircuts applied to the Settlement Members’ Accounts); and (iii) CLS Bank considers factors such as creditworthiness, liquidity and operational capabilities when setting or maintaining (or exercising its discretion to reduce) a Settlement Member’s Aggregate Short Position Limit. It is important to note that the Aggregate Short Position Limit does not restrict the volume or value of payment instructions that a Member may submit for settlement. This limit only controls to the extent to which payment instructions can be successfully settled across the Settlement Member’s Account as Pay-Ins are made during the settlement period. 3.2.3 User Members; Third-Parties; Pre-Settlement Risk

Any Settlement Member that sponsors a User Member is exposed to the credit risk of its User Member. The CLS system does not process any payment instruction of a User Member for settlement unless the instruction has been authorized by its sponsoring Settlement Member. The sponsoring Settlement Member provides this authorization, and therefore effectively controls this credit exposure, by employing certain automated authorization functionality (specifically a User Member short position limit, Aggregate Short Position Limit and credit limit) or individually authorizing the instruction, in each case in the CLS system.

With respect to credit risk that may exist between a Member and any customer for which it provides third-party CLS-related services, the Member controls this exposure through its bilateral arrangements with its customer, which do not involve CLS Bank and is outside the CLS system. In some cases, the Member may decline to submit one or more payment instructions involving a customer to the CLS system or, in other cases, may rescind any such instruction previously submitted by the Member involving that customer.

It should also be noted that participation by a Member in CLS Bank does not address pre- settlement risk, because CLS Bank does not guarantee the settlement of any transaction. Pre- settlement risk is the risk that a particular FX transaction fails to settle on either side of the transaction (as distinct from settlement risk which is the risk of paying out sold currency without receiving the purchased currency in return).

One example is a Member’s failure to make a Pay-In by the relevant currency close deadline, with the resulting short position causing the Member to fail one or more of the risk management tests described above in Sections 0.3.3 and 3.1.2. Unless both submitting Members have satisfied these risk management tests, the pair of matched instructions will be rejected. This failure to settle the FX transaction exposes the submitting Members to “gross replacement value risk,” which is the risk associated with having to replace the unsettled contract with a new, more costly FX transaction. Pre-settlement risk and gross replacement value risk are also relevant in connection with CLS Bank suspending a Member during a settlement session as described above in Section 1.3.3. In addition, in the event that one or more matched pairs of instructions

resulting from a split instruction settle while other pairs do not settle, the unsettled pairs of matched instructions would be subject to pre-settlement risk and gross replacement value risk. 3.3 CLS Bank: Management of Liquidity Risks

3.3.1 Multilaterally Netted Funding

The multilateral netting aspects of funding in the CLS system significantly reduces a Settlement Member’s Pay-In obligations. Multilaterally netted funding is most efficient from a liquidity perspective, because each Settlement Member is able to meet its payment obligations to CLS Bank in any currency by paying in an amount of such currency that is substantially less than it would need to make to each other Settlement Member as part of a bilateral settlement process. Netted funding encompasses all payment instructions, including single-currency payment instructions, and applies both to Settlement Member Pay-Ins and also Pay-Outs from CLS Bank to the Settlement Members.

The inclusion of single-currency payment instructions in the CLS system extends the benefits of multilaterally netted funding to such instructions. Given the number of and values associated with the single-currency payment instructions relating to credit derivative and NDF transactions relative to two-currency payment instructions relating to FX transactions, the commingling of these single-currency payment instructions with two-currency payment instructions in the CLS system does not materially adversely affect the benefit of multilateral netting for FX transactions across all currencies.

3.3.2 Funding Period; Efficient Pay-In and Pay-Out Algorithms

A funding period of several hours facilitates liquidity management by allowing Settlement Members (and if applicable their nostro agents) to spread the timing of their payments and make the best use of the overlapping opening hours of the RTGS systems. Pay-In Schedules are structured to ensure that settlement of all payment instructions occurs by the settlement completion time (09:00 CET), and Pay-Outs can be made in the currencies with early RTGS closing times. To accomplish these goals, the Pay-In algorithm requires a certain percentage of each Settlement Member’s funding obligations to be paid to CLS Bank by specified times within the funding period to ensure that sufficient amounts are paid in by: (i) the settlement completion target time so that the Settlement Member’s Account Balance will be within the applicable currency-specific short position limits, and the (Member-specific) Aggregate Short Position Limit; and (ii) the funding completion target time for the Asia Pacific currencies, so the Settlement Member has sufficient value in its Account to receive Pay-Outs in those currencies before the Asia-Pacific RTGS systems close.

CLS Bank seeks to make Pay-Outs of long positions to Settlement Members throughout the settlement process, in accordance with a Pay-Out algorithm which incorporates a set of defined criteria to ensure that sufficient value is retained in the Accounts to allow for the settlement of payment instructions, while minimizing the liquidity impact on the local markets. The Pay-Out algorithm reflects the criteria set forth in clauses (i)-(v) below and, to the maximum extent practicable, the criteria set forth in (vi) and (vii) (without regard to preferences of any Settlement Member):

(i) no Pay-Out will be made to a Settlement Member if it would cause such Settlement Member to have a negative Adjusted Account Balance;

(ii) Pay-Outs will only be made in currencies where a Settlement Member is projected to have a long position after taking into consideration the effect of its unsettled payment instructions (i.e., CLS Bank would not make a Pay-Out of a temporary intra-day long position);

(iii) if a Settlement Member has unsettled payment instructions, its Pay-Out will be in an amount that assures that sufficient value is retained in its Account to allow these Instructions to settle irrespective of a large intra-day FX market move; (iv) the Pay-Out of currencies with later currency close deadlines will be in an

amount that assures that sufficient value is retained in the Settlement Members’ Accounts to allow for the Pay-Out of currencies with earlier currency close deadlines;

(v) any Settlement Member receiving Pay-Outs has made some Pay-Ins of one or more currencies to CLS Bank;

(vi) the currencies in which CLS Bank holds the largest balances are generally to be paid as early as possible; provided, however, that currencies with earlier payment system closing times are generally paid before others (taking into account the need to create liquidity in certain currency markets by giving priority to Pay-Outs in such market’s currency); and

(vii) Pay-Outs in any currency are first made to Settlement Members who have the largest Account Balances.

To the extent that any funds received from a Settlement Member are not needed for settlement purposes on a specified settlement date, they will be taken into account by the Pay-Out algorithm and be automatically paid-out to the Settlement Member on that date. In normal circumstances where settlement of all payment instructions is completed, CLS Bank completes Pay-Outs of the long balances in its central bank accounts to Settlement Members before the close of each RTGS system. As a result, each Settlement Member will have a zero balance in its Account, and CLS Bank will have no funds in its central bank accounts, at the end of each settlement date.

3.3.3 Pay-In Calls

Pay-In Calls are viewed as the first means of raising additional liquidity in the event that a Settlement Member fails to satisfy its Pay-In requirements, regardless of whether the failure is related to an operational or credit issue. As previously indicated, however, Pay-In Calls could pose significant liquidity issues for Settlement Members because they are unexpected. Pay-In Calls are issued at fixed times prior to each currency close.

There are two types of Pay-In Calls – “Pay-In Calls for settlement” and “Pay-In Calls for currency close.” CLS Bank will issue a “Pay-In Call for settlement” to Settlement Members that have unsettled payment instructions with the Settlement Member that has failed to satisfy its funding obligations, in order to maximize the number and value of settled payment instructions during the settlement session. CLS Bank will issue a “Pay-In Call for currency close” prior to the closing time of an RTGS system for a particular currency, where a Settlement Member with a short position in the currency (based upon payment instructions submitted by the Settlement Member that have already settled) has an insufficient Account Balance to allow for the Pay-Out of a long position.25

25 _{See the discussion of the “window period” above at Section 0.3.2 – Overview of Funding. As a general}

matter, RTGS systems for Asia-Pacific currencies (located in Asia-Pacific time zones) close before RTGS systems in Europe, South Africa and North America.

3.3.4 Liquidity Facilities

As described above in Section 2.2.6, the continued failure of a Settlement Member to satisfy its funding obligations to CLS Bank would create a situation where CLS Bank may have sufficient funds (in terms of value), to satisfy its Pay-Out obligations to other Settlement Members, but not in the currency or currencies that the other Settlement Members are expecting to receive. This is because the unexpected and continued extension of any short positions must be offset by long positions in the Settlement Member’s Account; in the absence of such offsetting long positions, the Settlement Member would not receive the benefit of the extension of any short positions in any currencies. CLS Bank maintains committed liquidity facilities to provide funds in the needed currency to CLS Bank, to mitigate this liquidity risk. In the case of a continued Settlement Member failure, CLS Bank will access its committed liquidity facilities to make Pay-Outs to eligible Settlement Members in the expected currency or currencies.

CLS Bank maintains committed liquidity facilities in each currency for which the Settlement Service is provided, under which CLS Bank may cause its liquidity providers to enter into FX swaps or outright transactions intra-day (in each case upon demand). In an FX swap with a liquidity provider, CLS Bank would raise liquidity in the currency it needs to fulfill its Pay-Out obligations by exchanging currency in which CLS Bank has balances in its central bank accounts. These balances effectively represent the long positions in the failing Settlement Member’s Account, funds which CLS Bank would have paid out to the Settlement Member if the Settlement Member did not fail to cover its short position(s). The currency haircuts applied to the currency balances in the Settlement Members’ Accounts and the withholding of Pay-Outs to failing Settlement Members are designed to minimize the risk that these central bank balances will be insufficient to satisfy CLS Bank’s Pay-Out obligations to eligible Settlement Members. Under any FX swap entered into with a liquidity provider, in the second leg of the swap CLS Bank will be obligated to re-deliver the acquired currency to the liquidity provider. Upon any such re-delivery in full, the amount of the liquidity facility will be restored to the original amount (in the same way as an everyday revolving line of credit).

CLS Bank, at a minimum, maintains sufficient liquidity facilities in each currency to satisfy its Pay-Out obligations in the correct currency if there is a Pay-In failure by the Settlement Member with the largest short position in that currency (even if the failing Settlement Member is also a liquidity provider in that currency). However, in several currencies, CLS Bank has committed liquidity facilities that allow it to satisfy its Pay-Out obligations in the correct currency if there is a Pay-In failure by the Settlement Members with the two largest short positions in the currency. In those currencies where CLS Bank has only the minimum coverage, it is primarily due to the inability to acquire further committed facilities in the local market. In those situations, CLS Bank has the option of lowering the applicable short position limit to accommodate multiple failures. This would involve a trade-off between the benefits of accommodating a multiple Pay-In failure in the relevant currency, and the systemic costs of imposing a lower short position limit for that currency (as the lower short position limit would either reduce the number of instructions that can be settled in that currency or require Members to make larger pay-ins relative to their settlement activity).

3.3.5 Pay-Out of Equivalent Value in an Alternate Currency

As described above in Section 2.2.6, CLS Bank may satisfy its Pay-Out obligations using a currency that was not otherwise expected by the Settlement Members. This may occur if more than one Settlement Member fails to satisfy its funding obligations on the same date. As described in more detail in Section 3.3.4 above, CLS Bank may have insufficient liquidity facilities for a currency in which it has Pay-Out obligations, e.g., in a multiple failure situation. A Pay-Out in an alternative currency may also be required if a liquidity provider fails to satisfy its obligations to CLS Bank under the liquidity facility.

3.4 Members: Management of Liquidity Risks