Continuous Linked Settlement (CLS), the electronic settlement network for foreign exchange, is handling a growing proportion of transactions globally, according to a new report.
The survey shows that CLS is becoming an increasingly established and integral part of the foreign exchange markets. But some of the network?s earlier plans, such as adding money market instruments, have been delayed.
The report by TowerGroup found that two-thirds of CLS?s member banks now use it to settle at least 50% of their daily FX volumes. TowerGroup predicts that by the end of 2005, nearly 90% of CLS members will be using the network that extensively.
CLS Bank was set up in September 2002 to eliminate settlement risk in FX trades. Banks feed trades into the system and CLS matches and settles both sides of each trade simultaneously at fixed points through the day. Because settlement is simultaneous, banks do not need to set aside large amounts of risk capital.
Since this time last year, CLS has increased the number of currencies it handles from seven to 11, and has increased the daily number of trades it settles to around 130,000 from 30,000 a day.
This increase in activity reflects a growing acceptance by banks of the system and a general rise in the amount of FX business. Jonathan Butterfield, executive vice-president of marketing and communication at CLS Bank, says he is pleased but not surprised at the findings of the TowerGroup report. ?Our expectations were pretty bullish,? he says.
The creation of CLS was the result of a protracted period of consultation with banks and central banks. ?There was a huge amount of concern that we would create a two-tier system of price,? says Butterfield. ?But we could never understand how that would happen. Are you going to change the price when you settle? That is not feasible, and it is not an effect that we have had. What is happening is that the credit process is having an effect, so people are trading in a less constrained manner.?
The next step for CLS is to develop market data services based on the flows it observes, which will make the system more relevant to the front office at banks rather than catering predominantly to the back office. A free trial of market data services will be rolled out to member banks this summer.
But plans to introduce money markets instruments onto the platform have been put on hold after they were greeted with little enthusiasm by the bank?s members. Butterfield says it is more likely that swaps and the cash portions of options trades will be added first.