CLS service, launched by the CLS Bank went live in 2002 with the aim of eliminating foreign exchange settlement risk using a simultaneous global multi-currency settlement system. To date 296 institutions are now settling through CLS Bank, 58 of these are CLS Bank members. The remainder are banks, brokers, funds and corporates using the services as third-party members.
Funding and settlement has to take place within a five-hour window. For funding to be sent and received, the opening times of the relevant CLS Bank currency and the Central Bank Real Time Gross Settlement (RTGS) system must overlap. During this window all eligible settlement instructions for a particular date are settled. Funds are requested to be paid in by members, and paid out by the CLS Bank. Thus fulfilling the aim or purpose of CLS in providing a real-time process that enables simultaneous foreign exchange settlement across the globe, with the elimination of settlement risk caused by the time-zone differences.
Increasing the number of CLS eligible currencies increases the value and volume of payment instructions settled in one day and enhances systemic stability in the settlement of foreign exchange transactions. “This brings settlement costs down for the CLS community as economies of scale set in,” comments Clyde Muir, product market manager at HSBC. He added: “The global financial community benefits as an even greater percentage of FX deals have settlement risk removed, while automation and settlement finality are introduced.” An additional and possibly more important benefit of the new currencies is that they not only bring in all their currency’s local business, but also their dollar and euro business.
Rapid Uptake
On the 15th of December, 2004, just nine days after the new currencies joined, the CLS Bank set a new record settling 197,592 payment instructions that day with a gross value $3.684 trillion. During an average day CLS Bank will settle 170,000 payment instructions derived from foreign exchange deals submitted by members with a gross value of more than $1.9 trillion. Olaf Ransome, head of product development at Credit Suisse commented on the ease of introduction of the new currencies: “For the participants, introduction was very smooth. All of Credit Suisse’s new Nostros were immediately up to speed and operated as expected.”
For a currency to join CLS it must be able to pay for itself begins Jonathan Butterfield, executive vice president, marketing and communications at CLS Bank: “CLS are very pleased with the new currencies, particularly as in comparison to the previous currencies that joined they are more geographically dispersed and this further broadens CLS’s appeal.” On a practical level, there is more of a language and time barrier. Central Bank participation is crucial continues Butterfield: “in this case the central banks of the four new currencies were unstinting at getting things done.”
When a new currency joins CLS it is the culmination of approximately two years’ work. The first year involves working with the central bank and researching the legislative changes that would be necessary, the legal issue of finality, meeting local banks and the settlement members to assess the viability of settling the currency in CLS. From this research a business case is presented to the CLS Bank board for sign off. “CLS Bank will be active in a market for up to a year before they are confident to put forward a business case,” explains Butterfield. CLS Bank, settlement members and the central bank must all be in agreement before a currency can join.
For three out of the four new currencies payment instruction volumes have increased very quickly. Governor of the Reserve Bank of New Zealand Alan Bollard commented: “This is a substantial step forward for financial stability in New Zealand.”
South Africa
The South African Reserve Bank also welcomed the inclusion of the ZAR in CLS. “The Reserve Bank in its endeavour to reduce settlement risk of all market participants in the ZAR welcomes the domestic banking industry’s direct participation in CLS and thereby the inclusion of the ZAR in CLS as a settlement currency,” says Ian Plenderleith, deputy governor, South African Reserve Bank. The First Rand bank was the very first South African bank to go live in CLS, even in advance of the settlement members, explains Roland Merkelbag, senior business manager CLS for ABN Amro: “We see an ever increasing rand volume flowing through our systems.”
Merkelbag continues: “ABN Amro is very pleased with the introduced new currencies for a number of reasons. As for the three Asia Pacific ones we feel it is a very important step for the Asian market and will provide a major boost for CLS participation and the third party business in Asia.” Peter Pang, deputy chief executive of the Hong Kong Monetary Authority concurs: “The inclusion of the Hong Kong dollar is an important step in the ongoing efforts of the Hong Kong Monetary Authority in the elimination of settlement risks for foreign exchange transactions. It will facilitate settlement of foreign exchange transactions involving the Hong Kong dollar, which will help strengthen Hong Kong’s role as an international financial centre.”
Korea
For the Korean won the uptake has been much slower. CLS anticipated this explains Butterfield: “Korea is the country with the highest regulatory set of conditions CLS has had to deal with to date. It is not a surprise that there’s been a different growth rate in Korea.” Merkelbag regrets that the settlement member community has failed to embrace the Korean won as an eligible currency: “So far only five settlement members are Korean won eligible. While we recognise the won is still in the process of deregulation we do consider it a valuable addition, particularly in combination with the CLS enhanced fund functionality.” Muir feels the introduction of the won is particularly encouraging: “It may well be a precursor to wider deregulation for Korea, heralding even greater commercial opportunities. The initiative to introduce the Korean won took the markets by surprise. We expect the Bank of Korea to continue to encourage local FX players to join CLS.” Butterfield agrees with Muir: “the next step is to get the domestic Korean banks into the CLS programme.” Uptake of settlement members that are Korean won eligible looks set to increase. They need to be on-shore; with an FX trading licence and most of the Korean branches of existing settlement members are on different platforms. The Bank of Korea is 100 per cent behind CLS eligibility. “I am delighted to see the CLS system go live here in Korea after almost two years of preparation. The systems should stimulate our FX market activities and enhance our entire financial system stability,” says Soo-Myung Kim, assistant governor of the Bank of Korea.
Conclusion
Are there any new currencies on the horizon? “None are planned for the rest of 2005, although it remains our objective to add additional currencies in the years ahead,” concludes Butterfield. CLS Bank are very careful about providing the CLS community with the necessary lead time, typically a year is not sufficient explains Muir. However he speculates that there are future options “there are five or six new currencies on the radar, including the Chilean Peso.” Wait and see is the answer for the moment.