CLS announced in early December that it had extended its services to cover the net proceeds of non-deliverable forward (NDF) trades. The service has gone live with six member banks and one third-party customer and it will cover 48 reference currencies. Proceeds will be settled in any of the existing 15 CLS settlement currencies.
According to CLS, the number of banks using the service is expected to expand in the first quarter. The addition of NDFs marks a new phase in CLS’s evolution as the benefits are more from an operational standpoint than a mitigation of settlement risk. CLS says it costs at least $20 a trade to process NDF deals, but by bringing in a new level of standardization, as well as process automation, CLS expects this to fall as low as $2.
Andy Aschwanden, vice-president of custody & transaction services at Credit Suisse, agrees. "I think there will be significant efficiency gains for back offices. NDF confirmation and settlement processes are currently cumbersome and there is a lack of conformity even among the bigger players. This is limiting industry progress."
According to CLS, its latest initiative brings a new level of standardization of the NDF market. "For the first time the NDF market will have a comprehensive and standardized processing and settlement solution, all within a robust standard legal framework. CLS Bank has supported the market in the automation of post-trade processing for the 15 currencies it settles, and the extension to NDFs provides an effective post-trade solution for a total of 48 currencies", says CLS chief executive Rob Close.
Aschwanden says this might result in benefits at the front end as well. "It will be interesting to see if the streamlining of the back-office and IT processes that are delivered will remove some of the limitation of trading capacity in the front office," he says.
CLS has made several changes to its architecture to add the NDF service. In theory, this will make it easier to add new products, such as NDFs on other assets, which it will consider if there is user demand, and option premiums, which are expected to go live in 2008.