STP break puts banks at risk

Third-party banks using the continuous-linked settlement (CLS) service may be subject to increasing operational risk as a result of a breakdown in straight-through processing (STP), reports Risk's sister publication FX Week .

Wolfgang Prinz, product manager for Corona at Smartstream Technologies in Vienna, said that because some settlement members – the banks that settle trades on CLS on behalf of third-party banks – do not send confirmations on integrated systems, third parties must manually look up the status of trades on their settlement members' web browsers, thereby cutting STP.

"It's a break in STP and what did we introduce STP for? To reduce risk," said Prinz. "These banks are replacing settlement risk with operational risk."

While many of the 63 third-party banks now using CLS report that this break in STP does not worry them at the moment, Prinz believes that is because they are still in start-up mode and as volumes remain low, manual intervention is not too problematic. However, as volumes grow on CLS, and as the need for an audit trail of transactions becomes clear, these banks will feel very differently about straight-through processed confirmations, he believes. "In start-up mode it's not a problem, as volumes are low – it's not a big issue to monitor manually with five transactions a day." But with the kind of volumes that banks are projecting they will put through CLS, "you couldn't handle it manually".

CLS Bank, which launched on September 9, 2002, and operates the CLS service for forex, now regularly settles above $1 trillion a day, and hit a record of $1.45 trillion following the July 4 holiday in the US.