In 1996 the largest foreign exchange (FX) trading banks, calling themselves the Group of 20 (G-20), proposed the concept of continuous linked settlement (CLS) to eliminate settlement risk and potential systemic liquidity risk in the FX market and established CLS Services (CLSS) Limited. CLSS is in the process of setting up a specially chartered multicurrency bank, the CLS Bank International and creating a global CLS system. This TowerGroup Research Note discusses the implications of CLS Bank on FX and payments operations and settlement in commercial banks and its impact on liquidity and risk management. This Research Note also reviews the packaged IT solutions designed for CLSS member banks and other services marketed by IT and consulting vendors.
Additional Information
Highlights
A consortium of the largest foreign exchange (FX) trading banks, which called itself the Group of 20 (G-20), developed the concept of continuous linked settlement (CLS) and formed Continuous Linked Settlement Services (CLSS) Ltd. in 1997. As a holding company, CLSS will provide FX settlement services through a new bank, the CLS Bank.
CLS Bank will be a specially chartered bank based in New York and governed under US Federal Reserve Bank regulations. CLS Bank will hold accounts at the central banks of all CLS-eligible currencies and pay its members using national real-time gross settlement (RTGS) systems. CLSS shareholders can elect to be a settlement member or a user member of the CLS Bank.
CLS bank will issue a daily pay-in schedule to its settlement members and expect timely payments from members to complete settlement by noon Central European Time (CET). Settlement members will have to apportion the pay-in schedule provided by CLS Bank back to user members and third-party clients and also manage real-time liquidity requirements and credit risks.
ACI Worldwide, Fundtech, mpct Solutions, and TSI Software have introduced applications for CLS member banks. Logica offers consulting services and is developing a packaged solution. TowerGroup expects that most of the largest FX trading and clearing banks will adopt a build and buy strategy, and only a few member banks will build a 100% solution in-house.
Settlement and user members of the CLS Bank will have to install new information technology applications and enhance some of their existing global payments, FX reconciliation, liquidity management, and credit controls applications. TowerGroup estimates that member banks will spend approximately US$183 million between 1999 and 2003 on new applications and enhancements to their existing IT infrastructure for CLS.
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