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CLS; It will be worth having waited
CLS; Late? Yes. Ready?
Yes. Worth having waited? Yes
The basic four stages are operational approval, technical approval, low-value payments testing (LMPT ) and a scripted live test (CSLT ). At the end of June, thirty-nine banks had completed the first three stages. Successful completion of the first two stages demonstrates that their operations are ready, that systems are connected to CLS and can submit trades. The third stage, LMPT, tests the newly required discipline of intra-day timed payments. This third stage of the testing revealed only a very limited number of teething problems and showed that the shareholders had prepared very well for this crucial new discipline. Overall, this is a hugely positive signal and a welcome one at that, after the many delays and great front-office cynicism that the project teams have had to endure.
Important Points for the start of live trading
Standing instructions. The integrity of static data can either be the root of all evil or the source of effective STP. There are several important things that the front-office needs to pay attention to. Firstly, in the FX processing chain, the relevant part of the systems need to be aware of who is CLS eligible and secondly, the correct BIC code needs to be captured. Straight Through Processing, STP, is achieved by rules and standards. In CLS processing, the matching rules look at the exact 11 character BIC's submitted.
There are some very compelling reasons for all participants to designate a temporary "CLS Control Czar" in the front or middle-offices during the early stages of live trading. Firstly, cash flow and funding will need extra scrutiny in the opening weeks. There will be "in" trades and "out" trades and potential for a funding imbalance. The Settlement Members have to look closely at their positions on value date minus one, take into account the expected influence of . the "In/Out Swap " process anything that causes a mis-match of trades, as well as the advised intra-day limits advised by the nostro providers.
Secondly, all banks will have to look closely at their "unmatched trades" in CLS. In the initial phases, it is highly likely that there will be a high
mis-match rate. Potential causes of this will be incorrect BIC information, as well as lack of clarity on the timing of the start for different branches and subsidiaries. CLS is working to ensure all participants have accurate static data and contact data available from the start. Achieving a high first pass matching rate in the early stages is essential for several reasons. Firstly, if the matching rate is low, back-offices will be confronted with a major challenge to monitor all the exceptions and re-book. Secondly, CLS will be charging for cancellations.
Reducing and Re-Allocating
the Credit Lines
Third Parties; why are
Back-offices in the securities world have long faced the problem of managing domestic settlement v. Euroclear or Clearstream. The FX world with CLS is no different. FX operations managers and funding desks will have an easier time, and by implication lower costs, if there is just one standard. Secondly, the Third Party market is a key factor in enabling CLS to drive costs down to the target level of $1.50 for all. It is worth noting that this is below the price of a settlement in FXNet today, with the added benefit of a single funding position and wider participation.
Third Parties; will they
take part, why and when?
Additionally, there are banks, such as Brown Brothers Harriman and WGZ, who have a leading role in their respective markets and want to show that they adopt a leadership position in changing markets. Our own estimate is that there will be an absolute maximum of twenty pioneers willing, ready and able to start before the end of 2002. The "Early Adopters" are those that are now ready to make a decision on a provider. They have done the research, asked the questions, in many cases sent out RFP's and analysed responses and are now down to a short list of two or three providers.
If we assume that their aim is to start in Q1 2003, then these decisions need to be made now. Our experience of working with Third Parties is that at least seven months are needed between making a decision and being ready to go live. If CLS can get its directory service up and running, then Third Parties will be able to separate the preparation stage from actually going live, by selecting a starting date based on what the market is doing.
The next group of entrants will be the "Early Majority". These are the banks that will set their sights on joining in Q2 / Q3 2003. Our experience shows that there is widespread awareness, interest and willingness to join amongst Third Parties. There are very significant numbers of banks that could be classified as early adopters. These range from the "might have been settlement members" to the leading banks in each market place. There is also an encouraging number of banks that we would classify as "Early Majority"; these banks have been gathering information and are now likely to increase the pace of this activity.
In continental Europe, some banks prefer an extensive information gathering process to the traditional RFP process that is common in the Anglo-Saxon world. An important consideration is also Basle II; banks are becoming increasingly aware of operational risk and the need to prepare. Going forward, it is not unreasonable to expect the use of CLS settlement to have an impact on the calculations. Based on CSFB's own analysis, we should expect the typical market evolution dynamics and statistics to apply.
Services; The Killer Application in the CLS Market?
Secondly, multi-purpose accounts are in demand. Banks are looking for a service provider that can provide not just CLS settlement, but a payments service for commercial and treasury needs too. They are asking for a nostro with full SWIFT support in every currency, taking a long-term view that they will switch to one-stop shopping, buying multi-currency payment services in the same way they buy a global custody service on the securities side of the business. This is a seminal development in the FX market; we have seen the same trends in the securities business and with the current market conditions and pressure on costs, this "outsourcing" approach offers both opportunities for the creative service providers, as well as for the Third Parties.
CSFB CLS Project Team
LMPT: Low Value Payments Testing. This is a series of tests using live production systems where the banks are required to prove that they can instruct payments and move funds on an intra-day basis in accordance with a strict timetable, the so called "Pay-In Schedule". The process is based on the standard SWIFT MT202, with special annotations for timing requirements
CSLT: Continuous Scripted Live Test. This is an end-to-end test from trading through matching to settlement.
BIC: Bank Identification Code, this is an eleven character alphanumeric identifier. For example CRESCHZZ80A
In-Out Swaps: A special funding procedure that only affect the Settlement Members. Essentially an FX swap is done with one leg in CLS and the other outside. same day value with no swap points. At the expense of leaving some settlement-risk in the system, liquidity risks are reduced.
information contact Olaf Ransome, Head of Product Development & Support
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