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.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here