Clearing the Air

Continuous linked settlement, or CLS, promises to mitigate much of the counterparty risk involved with settling high-value interbank payments.

The New York-based and bank-owned CLS Bank plans to operate a "financial utility" for interbank settlement, ensuring that both sides to a trade have paid in before either side collects their funds. Eventually, CLS bank will intermediate the bulk of the world's foreign exchange transactions, a market that generates an estimated $1.2 trillion in average daily turnover.

In preparation for an imminent launch, CLS Bank has been testing and retesting its systems. CLS member banks, in turn, have been getting ready for the new environment by preparing to offer CLS services to their clients. One example is Deutsche Bank, which has established a "control utility" in London to provide settlement assistance to its bank and corporate clients.

Wayne Ferguson, vice president, global cash management, will be responsible for positioning Deutsche Bank's CLS third-party services globally. He agreed to participate in an e-mail interview with BS&T senior associate editor Ivan Schneider. Here are some excerpts from that discussion.

Wayne Ferguson vice president, global cash management Deutsche Bank

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BS&T: Please describe the control utility. What kinds of resources does it provide third-party banks and their clients?

FERGUSON: The Deutsche Bank control utility is located in a secure and segregated environment in our London offices. Staffed 24 hours each workday, this multi-lingual team will be available for inquiries and to provide dedicated assistance to clients on failed messages, funding issues, etc. The control utility utilizes phone, fax, e-mail and SWIFT addresses in order to expedite communications.

BS&T: Including the control utility, what are the dimensions of competition in the provider market to third-party banks?

FERGUSON: Deutsche Bank CLS Third Party service, db-CLSTMLink, is a comprehensive service covering transactions and settlements in each of the CLS-eligible currencies. The service is end-to-end including trade capture, matching notification, netted funding, settlement options, projected cash positions, and end of day statements. Moreover, each step of the Deutsche Bank CLS process includes various options designed to enhance the clients' choices and make for an easier implementation. Importantly, Deutsche Bank's service is in a state of early readiness. With security and contingency matters complete, our staff can-and has-invited clients to perform due diligence and testing on our service.

BS&T: Which types of banks will be best prepared for CLS from an infrastructure standpoint?

FERGUSON: Deutsche Bank is one of the few banks participating in each step of the CLS Bank's member testing. This kind of preparation will help us to attain the operational certification required from CLS Bank itself in order to be live on day one of CLS processing.

BS&T: What degree of expense reduction can a bank expect from reduced clearing fees?

FERGUSON: A participant in the CLS process can look forward to the netted funding feature of CLS. Settlement Members will be able to settle their individual FX trades on a netted funding basis, in effect making one settlement per currency per day for all of their CLS-eligible trades. This reduces the number of payments to be effected, the number of items to be reconciled, the amount of interest expense caused by incorrect payments, etc. Through db-CLSTMLink, these are advantages that Deutsche Bank can pass along to our third-party clients, allowing them to receive the same benefits.

BS&T: Since CLS helps remove settlement risk, what effect do you expect this to have on spreads in the FX market?

FERGUSON: It is still too early in CLS' life to have an accurate picture of settlement risk reduction effect on spreads. The FX market is a particularly efficient one, however, and tends to evolve and adapt to industry conditions and requirements quite quickly. It is worth noting that most of CLS' initial customers belong to the interbank market where spreads are already very thin, so any dramatic change seems unlikely at this juncture.

BS&T: For banks doing business in the U.S., how does db-CLSTMLink tie into regulatory compliance requirements?

FERGUSON: The db-CLSTM Link service will definitely include an OFAC (Office of Foreign Asset Control) filter in order to comply with U.S. banking regulations. Deutsche Bank will fully comply with this regulation in its current and future CLS developments.

BS&T: Any unique or specific needs or requirements for European or Asian bank customers?

FERGUSON: Most clients have similar needs regardless of where they are located. They each require speed of information, comprehensive client support, etc.