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Page last updated
February 15, 2003

 

 

IBackground to CLS

www.mpct.com

Ever since the ignominious collapse of Bankhaus Herstatt in 1974, bankers and regulators have been worried about the risk associated with settling foreign exchange deals. Subsequent bank closures, including BCCI in 1991 and Barings in 1995, have exacerbated the concern. In 1996 the Bank for International Settlements published its report entitled 'Settlement Risk in Foreign Exchange Transactions' which set out clearly the nature of the risk - in particular noting that the exposure lasted from the time a payment instruction for the currency sold can no longer be cancelled unilaterally, until the time the currency purchased is received with finality.

The CLS initiative follows directly from the recommendations of that report. CLS stands for 'continuous linked settlement' and, put simply, is a means to eliminate the time delay between the two legs of the transaction by enabling both to settle simultaneously.

CLS has received substantial investment from over 60 of the world's largest Foreign Exchange trading banks and, with strong support from banking supervisors, it's already on line for full operational testing. If all goes well, it will go fully 'live' in October 2000.

Far Reaching Consequences
So is CLS just another form of settlement procedure? Far from it! CLS has far reaching consequences, it will greatly change risk profiles, foreign exchange trading patterns and correspondent banking relationships. Instead of the thousands of payment transactions taking place daily as a result of today's bilateral foreign exchange deals struck between counterparties, the CLS Bank will itself become the counterparty, and organise the scheduling of payments in and out according to a strict daily timetable. This will have a huge impact on payment processing (especially timing) and liquidity.

CLS presents business opportunities and threats to banks of all shapes and sizes. The larger banks that have chosen to become settlement members have realised that they need to undertake major systems and re-engineering projects to capitalise on the new opportunities afforded by CLS. The effort has to be focused in three areas:

n Reorganising the business day around the CLS daily timetable

n Building service capability to pass on the benefit of a low-risk settlement service to branches, subsidiaries, user members and third parties

n New tools for liquidity management

This has to be achieved at the same time as most banks have ordered 'freezes' in their systems environments until the risk ass- ociated with the Y2K bug has safely passed into history.

The Urgency
The timetable for the introduction of CLS is, however, relentless. Banks that wait until 2000 to begin their system changes will, quite simply, miss the boat. Several banks begin operational trials in March 2000 and the system is expected to be operating fully 'live' in October.

With the arrival of the euro in January 1999, and the new millennium in January 2000, most banks might have preferred some time to recover from the exacting pace of system changes. But the banks who have identified the competitive opportunities offered by CLS are keen to press ahead without delay. These include several of the global banks which mpct Solutions a company at the forefront in development of CLS solutions counts among its customers. They became involved in the CLS initiative for three reasons. First, the list of their customer banks includes many of the leading players who are likely to be participants from day one. Secondly, most of their key people are former bankers who understand what CLS means to the community, how it impacts processes, workflows and organisational structures and what system functionality is needed, to allow full participation in the new service. Thirdly, their team of business architects broke those functionality requirements down into familiar components such as position management and payment scheduling, and found a good fit with the existing ATLAS architecture already deployed in several global banks.

In May 1999 mpct Solutions announced the CLS Server a new solution to be built on the foundation of the ATLAS architecture. A key design criterion, however, was to develop a system that would fit rapidly into a bank's existing processing environment and operate largely as a 'black box', whilst fully integrating into the bank's process flow. To facilitate this, each bank planning to install CLS Server is provided with a '3I Study'. The 3 'I's are

n Impact - the effect on the bank's existing infrastructure

n Integration - the required interfaces between the existing infrastructure and the CLS Server

n Implementation - the plan and timeline for the implementation project

Amongst other things, the study identifies the key success factors for new system. These typically include:

n Transaction volume growth

n Risk management improvements

n Management information improvements

n Error reduction

n Product diversification

n Project risk reduction

Other vendors, especially middleware suppliers, are offering CLS capabilities, but in terms of functionality, readiness and ease of implementation, mpct Solutions is way ahead of the pack. CLS Server is a stand-alone CLS settlement processor specifically designed to minimise the changes that the new settlement process would otherwise impose on a bankÕs legacy systems. CLS server brings banks the opportunity to capitalise quickly on the risk reduction and commercial opportunities that CLS affords. It fully supports the needs of the bankÕs own global treasury as well as the processing needed to service branches, subsidiaries and other banks.

John Sherlock
MPCT Solutions

 


Settlement Risk
Background  to CLS
Custodians
Complex?
Worth having waited
Global FX
Radical change
3rd Party customers
The Future

 

 
 

 

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