06:17 AM
CLS Bank Goes Live
CLS Bank, a long-awaited high-tech mechanism for settling foreign exchange trades, has opened with a flourish.
In its first three weeks of operations, it settled in excess of 100,000 foreign exchange payment instructions, totaling over $1 trillion in value, from its 39 settlement members. Settlements were running at over 10,000 per day with a gross value of over $100 billion. The number of payment instructions settled in the third week of operations was double that for the first two weeks put together.
These totals were achieved with only the initial group of 39 settlement members connected to the CLS service and still operating in a controlled environment. Later, the CLS Bank service will be made available to member customers in the global bank-to-bank market.
The world's major financial institutions are counting on CLS Bank's real-time information and near-instantaneous transactions in order to reduce the risk of trading foreign currencies, known as Herstatt risk.
Seven central banks, including the U.S. Federal Reserve, and 66 major financial firms spent $300 million and six years building CLS Bank.
Citibank processed $2.5 billion in currency trades on the system during its first day of operation.
"The efficiency gain is that we have fewer payments to do and fewer reconciliations," said Michael Knorr, global CLS product manager at Citibank. "And we'll have real-time information available during the process."
Faster settlement helps mitigate the impact of world events, major economic news, and interest-rate changes on a nation's currency.
Banks trade about $3 trillion in currency every day. In a typical trade, two banks will agree on an exchange rate, clear the deal with their respective central banks, then wire the money to each other-a process that could take two or three days. During that period, a bankruptcy, sudden change in rates, or some other contingency can delay settlement. Eliminating this risk, known as Herstatt risk, is the raison d'etre of CLS Bank.
"There's a need for the banks to see this risk eliminated, because the value and size of the trades have become so large that if something went wrong, the effect would be catastrophic," said Joseph DeFeo, president and CEO of CLS Bank International.
CLS Bank hired IBM to build the network and the computing infrastructure, which is based on server clusters running AIX, DB2 databases, proprietary middleware, and custom trading applications.
The system features multiple levels of authentication, plus two matching systems in separate locations with immediate failover and a third backup site that can be brought online immediately.
Each member bank links into the CLS system through gateways set up by IBM. The banks, which developed their own real-time trading applications, are provided with a graphical user interface from CLS to make it easier to connect to the system.
CLS Bank has begun a phased rollout in which small groups of member banks conduct trades with one another to test the system. Those groups will expand during the next few months until trading is completely open.
Over time, CLS Bank plans to add more central banks, currencies, and financial institutions to the system.