RiskFX Risk/CLSCLS for Fund Managers

CLS for Fund Managers

CLS is rapidly becoming the foreign exchange settlement standard in the industry
for banks, broker dealers, and multinational corporations, and all sectors have
reported front and back-office benefits that extend far beyond settlement risk
reduction. CLS can settle FX trades for both treasury and securities clearing
and the next wave of CLS participants will be fund managers, including pension
funds and asset management divisions of banks and insurance companies, as well
as investment managers. Fund managers will benefit significantly from CLS, and
their volumes are expected to be second only to CLS shareholder volumes by 2007.

Why participate in CLS?

Fund managers should participate in CLS because they are required to conduct
business in the safest manner possible as part of their charter. However, the
reduction of settlement risk is only one of the many benefits fund managers
will reap from CLS. Today, securities settlement is characterized by a high
degree of operational and credit risk. One typically does not learn that funds
did not arrive and one’s account is overdrawn until the day after settlement
date. With CLS, fund managers experience far greater predictability, more certain
settlement and a host of other benefits. Fund managers are third party participants
who submit their CLS-eligible FX transactions to CLS through their CLS settlement
member [1].

Reduce payments and Investigations

Rather than make multiple gross payments for trades, CLS participants manage
one net position per currency (a single debit or credit position) in their end-of-day
funding process with their settlement member. This netting down of foreign exchange
payments results in greater liquidity. Perhaps more importantly for fund managers,
it also means payments for trades, including misdirected/late payments, compensation
claims, and the time and cost required to conduct payment investigations are
virtually eliminated. CLS will radically reduce the time fund managers spend
on investigating misrouted or lost payments.

Monitor the entire settlement life-cycle in real time

CLS offers easy intraday access to real-time information that enables fund
managers to see and fix mistakes ahead of settlement day. With CLS, participants
know what has matched and what has not matched and can proactively initiate
investigations, ensuring far fewer fails and the timely receipt of cash.

Streamline funding, settlement and reconciliation

CLS increases automation of the entire settlement process end-to-end and provides
integrated matching, settlement, and reconciliation services. A quality CLS
provider will provide end-of-day statements and online information detailing
individual settlements in each currency to facilitate real-time reconciliation.
A fully automated CLS solution that is integrated into the back-office enables
fund managers to streamline funding, settlement and account reconciliation,
and achieve higher STP rates. As a result of increased operational efficiencies,
the cost of foreign exchange settlement drops.

Monitor all activity via one operating account

With CLS, fund managers can get information for multiple trades in multiple
currencies from one place, rather than from multiple accounts/banks. Fund managers
receive one fully reconciled account statement showing all the settlement details
for both sides of each transaction.

Certainty about intraday and end-of-day cash positions

Depending on the CLS provider, CLS can facilitate predictable, timed payins
and payouts. These timed pay-ins and payouts provide fund managers with more
certainty about their intraday and end-of-day cash positions and improve forecasting.
Proceeds can more easily be scheduled to facilitate funding of business activities
during the day.

Increase trading

CLS significantly reduces settlement risk, and along with it, the need for
settlement risk credit lines – freeing up credit. In addition, the need
for daylight overdraft lines to make payments may be reduced because of the
netting effect. And finally, since CLS protects against settlement risk, fund
managers who participate in CLS may be able to consider trading with an expanded
group of counterparties.

Greater audit control

Without CLS, a fund manager’s audit responsibilities and costs expand
as they audit different processes for different currencies provided by different
banks. CLS concentrates funds into one bank, in the CLS operating account, and
brings information on all currencies and transactions into one place. CLS is
a single, transparent process that provides fund managers with increased control
– complete transparency of real-time information that is easy to audit
and approve.

Implications for fund managers

Fund managers have unique needs as CLS participants that may or may not be
properly addressed by the various CLS providers. For example, fund managers
have a fiduciary responsibility to their clients to provide timely, accurate
reporting. Fund managers will also need a CLS provider who can provide intraday
timed payment services, and enough liquidity to handle the high value payments
the fund manager and their clients will require. Fund managers should first
choose a
CLS provider based on the excellence of the provider’s CLS capabilities
and their experience in the marketplace. Next, they should consider if they
can gain efficiencies by using existing custody/FX providers for CLS settlement
– in order to leverage existing interfaces and instructions on the custody
side and benefit from a lower cost of settlement (and book transfers) on the
FX side. When properly implemented and integrated into the back-office, CLS
not only mitigates FX settlement risk, but also creates significant efficiencies.
For fund managers, CLS can be a catalyst for achieving higher levels of automation
and straight-through processing and radically reduce time and cost spent investigating
misdirected and lost payments. Fund managers who embrace CLS will not only keep
pace operationally with other financial institutions, they are likely to gain
competitive advantage by streamlining processes and costs.

What is CLS?

Continuous Linked Settlement, or CLS, which was created by over 60
of the world’s leading financial institutions to mitigate foreign
exchange settlement risk, links multiple realtime gross settlement systems
in real-time for a five hour window, through CLS Bank International.
CLS radically reduces foreign exchange (FX) settlement risk by settling
both legs of an FX transaction simultaneously and irrevocably on a payment
versus payment basis, irrespective of geographies or time zones.

What currencies can be settled in CLS?

CLS settles FX transactions in the following currencies: Australian
Dollar, British pound, Canadian Dollar, euro, Japanese yen, Swiss franc
and US Dollar and, as of September, 2003, the Singapore Dollar, Norwegian
Kroner, Danish Krone, and Swedish Krona.

What process will fund managers use to settle trades in CLS?

Fund managers must be sponsored by a CLS settlement member to participate
in CLS and can leverage their existing SWIFT MT304 process to settle
trades in CLS, using the MT304 as a payment instruction to their CLS
provider. CLS Bank will match custody FX trades using the fund identifier
(which is the account number at the custodian bank). Fund managers and
FX counterparties will populate field 83J/ACCT/ on SWIFT MT300s and
304s with the fund identifier to identify the fund and enable matching
in CLS.

[1] CLS Bank only permits its shareholders to participate directly in its settlement
system. Most direct participants are settlement members, while a few are user
members who outsource payment responsibility. Indirect participants of CLS rely
on a direct participant to submit trades and execute payments. Indirect participants
include third parties, who are the clients of settlement members and user members,
and fourth parties, who are the customers of third parties.

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