The volume of instructions submitted through CLS Bank is predicted to increase 150 percent by the middle of 2005, according to research conducted among 40 of CLS Bank's settlement member banks. CLS Bank currently settles on average almost 70,000 payment instructions per day with an average gross value of approximately $800 billion, with over $50 trillion settled to date.
Undertaken jointly by TowerGroup and CLS Bank, the research was intended to provide CLS stakeholders with a real insight into CLS' impact on the financial markets, said David Medeiros, director of global payments at TowerGroup. "The results will serve to educate the market, particularly other potential settlement members and third parties, about the benefits of being part of the CLS eco-system."
Spurred by regulators and a need to control foreign-exchange settlement risks, a group of large trading banks (the G20), with large FX market exposures launched the continuous-linked settlement (CLS) initiative in 1995. Exposure, or settlement risk, is created in a transaction when counterparty A pays and, for whatever reason, counterparty B does not. CLS is designed to eliminate such risk by settling foreign exchange transactions on a payment versus payment basis, i.e., as a settlement member pays away one currency, it receives an equivalent value in another.
Total CLS volume is projected to hit 100,000 instructions per day by mid-2003, 150,000 by mid-2004, and 176,000 by mid-2005. Settlement members gave expansion of the number of currencies settled through CLS Bank as their primary desired service enhancement, followed by the provision of automated settlement, standard settlement instructions and additional matching services.
Over 95 percent of settlement members gave reduction of settlement risk as an important or very important motivation for joining CLS Bank, followed by avoidance of regulatory action (88 percent) and improved straight-through processing rates and reduced errors (65 percent).
Clear front-office benefits were also identified. Over half of respondents reported that CLS had a positive impact on counter-party credit approval processes, with 16 percent stating that CLS had resulted in a change in trading practices. Decreased funding via multilateral netting was cited as the main impact of CLS on treasury practices, followed by better pre-settlement cash forecasts and the reduced use of "daylight credit," or allowing a payment system participant to overdraw against available account balances, so long as all accounts ultimately settle with positive balances by the end of the settlement session.
The majority of parties (75 percent) claimed that since their implementation of CLS, the rate of failed trades had dropped to zero. The main benefit perceived by settlement members from the provision of CLS third-party settlement services was that it enables a strong customer relationship to be formed that may be leveraged by other business areas; 95 percent of respondents agreed that the third-party market shows excellent long-term potential to enhance customer relationships.
Factors cited as driving the provision of third-party services were the cost of establishing the service and the management of third-party credit exposure.
In its seven months of operations, CLS Bank has delivered real benefits to settlement members and to the market, according to Joseph De Feo, president and CEO of CLS Bank International. "This research highlights many opportunities for both the front and back office in participating in CLS, and provides evidence that the benefits of CLS go far beyond risk reduction."
Encouraged by the potential volume growth predicted by settlement members, Suzanne Labarge, chairman of CLS Group, said the results validated the CLS concept. "Over the coming years we aim to continue to deliver a world-class settlement service."