CLS for FX is 'changing the front-office'

The continuous-linked settlement (CLS) service for foreign exchange trades has changed credit and trading practices among the majority of its users, reveals research from IT consultancy TowerGroup published this week.

More than three-quarters of CLS settlement members – those holding direct accounts with the settlement service – report seeing changes to the credit approval process for CLS counterparties, reports RiskNews’ sister publication FX Week.

This is taking the form of reduced use of credit limits – 59% of settlement members report this as a result of using CLS – and the elimination of settlement limits altogether for CLS counterparties, according to 15% of settlement members.

"We think logically there should be no more settlement limits for CLS counterparties," said Jonathan Butterfield executive vice-president of marketing and communication at CLS Bank International in New York.

As CLS reduces settlement risk, credit limits may be reduced in line with the reduced likelihood of a default in payment.

However, while evidence is now clearly pointing to changing practices in credit, and counterparty preference, there is no evidence of any changes in prices quoted to CLS members, said Butterfield.

It had been expected that with reduced settlement risk, the cost factored into a trade for that risk could be removed and CLS users would get better prices for forex trades than those outside the CLS community. However, Butterfield said this is not practicable.

Nonetheless, said David Medeiros, director of research for global payments at TowerGroup, "What really came out of this year’s survey is that while CLS is designed to reduce systemic settlement risk, the ancillary benefits are now starting to show." This is coming out now, over a year and a half after the service was launched, because its users are now more experienced with the system.

In the survey, CLS users also indicated that they expect to settle 90% more instructions a day on CLS by the end of 2005 – it currently settles an average of 130,000 instructions a day, with a gross value in excess of $1.3 trillion. These expectations, based on settlement members’ responses, are a little ahead of CLS’s projected numbers, said Butterfield.

41 settlement members and 36 third-party CLS bank users responded to TowerGroup’s survey, which was carried out in February.