Tech glitch strikes CLS

The failed settlement of more than 20,000 Australian dollar and yen trades on the continuous-linked settlement (CLS) service last week was caused by multiple technical faults, senior CLS officials said.

An outage in the CLS Bank server was discovered at around 10:20 central European time on March 25, said Joseph De Feo, president and chief executive of CLS Bank. "The system ran out of database space and didn’t have anywhere to write records so it stopped," he told RiskNews sister publications FX Week. "IBM [which supplies the core CLS technology] worked on first identifying that that was the reason and then to free up space, and we restarted the system. Everything came back up again and it looked like we were going to be OK."

But as the outage occurred before the 10:00 CET settlement window closure, CLS needed its participating central banks to extend the opening time of their real-time gross settlement systems (RTGS). The instruction for the system to extend was input, but a second technical glitch resulted in the instruction being delayed.

"There was an enormous amount of pressure, and there was a delay in moving up the deadline for the close of the Asia-Pacific currencies," De Feo told FX Week. "Because we missed updating the system to tell it that the last part of the grid was being moved up, the system could not settle [Australian dollar and yen] trades because the RTGS’s were closed."

The Asia-Pacific settlement window is two hours shorter than the European and North American window, so trade settlement for US dollar, euro, sterling, Swiss franc and Canadian dollar transactions was not affected.

As part of the service’s contingency plans, banks with non-settled trades were required to resubmit them and the trades were settled 24 hours late. "This was the first time it had happened so there was a bit of discussion and debate about which path we should go to settle the remaining trades, but everyone agreed that the safest path and the one that would cause the least amount of difficulty for the whole community would be to resubmit the trades the following morning, which is what everyone did. Everything cleared out," De Feo said.

The system was fully operational within hours of the outage and later the same day more than 53,000 European and North American trades were settled, De Feo said.

Users of the CLS service last week said the glitch – the first major problem to hit the service since its September 9 launch – did not represent a blow to the service’s claim to reduce settlement risk.

"Nobody was ever at risk of losing their principal," said Michael Knorr, Citigroup’s CLS project manager in New York. "Everyone knew where their money was. From a settlement risk perspective, the system is holding up." On the other hand: "Operational efficiency suffered a blow. Nevertheless it’s a baptism of fire and things were handled," continued Knorr.

De Feo said the outage did provide CLS Bank with an opportunity to enact its contingency plans, which stands the service in good stead for the future.

"We need to see whether there is any strengthening that needs to be done on the decision-making processes when we go into contingency with our shareholders and the central banks," said De Feo. "Clearly there is concern expressed about what happened and what we are going to do about it not happening again, but there was a lot of complimentary feedback in terms of the professionalism in handling it and the fact that we were able to maintain and retain good control."

Had the outage occurred at any another time during the day, settlement would have been unlikely to be affected, he added. "The issue really was that this was very close to the time when settlement was beginning," De Feo told FX Week. "It was the timing of the problem rather than the gravity."

Other users of CLS said banks suffered varying amounts of disruption due to the outage. "Banks have different pain levels in terms of resubmitting their trades depending on the institution," said one senior foreign exchange official at a US bank in New York. "For some, it will be a question of just pressing a button but for others it will be more complex."

"We were included in those affected but it was very manageable," said Olaf Ransome, head of product development and support for CSFB’s transaction services and solutions group in Zurich.

CLS now settles around $600 billion in forex volume a day.