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CLS Bank Seeks To Expand From Trillion-Dollar Mark

CLS Bank management and shareholders aim to increase the strategic value of critical industry infrastructure.

Even as East Coast U.S. cities shoveled out from a sizable snowstorm, the six-month-old CLS Bank hit the trillion-dollar mark. On the Tuesday following Presidents' Day, the global multi-currency utility settled over 117,000 payment instructions for foreign exchange transactions. The prior record for the six-month old system was $891 billion, after the Martin Luther King, Jr. Holiday. So far, the average daily volume has been in the neighborhood of $600 billion in foreign currency exchanged through 50,000 instructions.

Joseph DeFeo, president and CEO of CLS Bank International, expects substantially higher volumes in the year to come. He also anticipates new bank shareholders, additional currencies such as the South Korean won and the South African rand, and increased adoption by third-party participants and corporate users.

CLS Bank acts as an intermediary to foreign exchange trades, ensuring that both sides have paid in their obligations before either side receives their funds. Theoretically, the platform could provide the similar benefits to other asset classes, including fixed-income, equity and derivative instruments. "We are working very hard to develop strategies to exploit this infrastructure and legal framework," said DeFeo at a recent BAFT conference in Washington, D.C.

To be certain, the shareholders in CLS Bank agree with that approach. "This system cost us an awful lot of money. You're not going to just let it sit there and collect dust," said Barry Holland, director of treasury operations for Barclays Capital. "Let's make use of it, push it out and put other products out there."

Added Phillip E. Scott, senior vice president, The Bank of New York, "It's critical that CLS expand the use of the utility."

Indeed, the shareholder banks would benefit from the ability to spread its new costs across a wider swath of products and customers. "Prior to CLS, the inter-bank community did a fairly good job with expenses," said Scott. "With CLS, unit cost has gone up significantly."

That's because CLS requires fewer "units" in order to manage daily volume. According to Lee Kidder, director of wholesale banking for TowerGroup, adoption of CLS reduces the number of payment instructions required for settlement by 90 percent, as net transfers replace individual transactions. "Lower settlement risk leads to lower revenue from payments," said Kidder.

However, as the broader business community and bank regulators around the globe learn to appreciate the benefits and the added security offered by continuous linked settlement, CLS member banks expect to recoup their investment from their third-party correspondents and corporate treasury customers.

CLS Bank's DeFeo also points out that the reduced number of payments will lead to an advantageous cost structure from fewer errors and better reconciliation. Although CLS may disrupt existing business models, that's not a bad thing for the industry as a whole. "The industry has always done this to itself," said DeFeo. "Most of our board of directors see this as strategic."

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