Bank race for CLS clients

The world’s top FX banks are racing against time – and each other – to sign up a potential 2,000 third-party banks and institutions as clients for a new forex settlement system, Continuous Linked Settlement (CLS).

Those marketing their connection services to CLS – due for launch in October – stand to gain increased forex business from the third parties they can convince to use their systems.

And according to officials at some of the 66 CLS shareholder banks, competition for third-party custom is so fierce, they are offering the service almost at cost price to safeguard relationships and their future positions in the global FX industry.

"We think over time, the cost of remaining in the FX business as a market-maker is going to be prohibitive for most of the market," said Seth Cohen, head of global FX distribution for banking clients at UBS Warburg in London. He said UBS Warburg believes in two years’ time there will be just five banks, including itself, dominating the global FX industry – a situation that will be driven by bigger and bigger barriers to entry. "And like the move to online trading, and the provision of prime brokerage, this [the provision of CLS third-party services] will tell who’s left standing," he told RiskNews’ sister publication FX Week.

HSBC, another leading contender in the CLS third-party market that claimed it was first bank to put out a CLS third-party proposal, agreed with Cohen. Rob Bolton, senior project manager in payments and cash management at HSBC in London, said: "None of the big providers expect to make money on the trade. The reason we’re in this is for the long-term - for the relationships and the global multi-currency business."

He said when the prospect of non-CLS member banks using the system via other banks was first mooted a few years ago, the cost per trade was rumoured at around $30. The expectation now is that it will cost $2 to $3 per trade – cheaper than current clearing costs and cheaper for some banks than accessing CLS directly.

For the third-party banks, some of which are CLS shareholders opting to use other banks for cost reasons, the advantages are numerous.

First, many recognise they need to be involved in CLS or be relegated to a second tier of FX pricing in the post-CLS environment. "Banks left outside CLS will eventually be hit by higher capital costs," said UBS Warburg’s Cohen. "Eventually, there could be a two-tier pricing system whereby those banks that are settling outside the CLS system will be more expensive to trade with."

Second, for cost reasons, even some of the existing 66 CLS shareholders might find it cheaper to use the services of the bigger banks.

Citigroup, for example, has already signed CLS shareholder WestLB as one of its seven third-party clients, and, said Michael Knorr, global CLS product manager at Citigroup in New York, around 10 other CLS shareholders are also going down that route.

The reason for that is the cost of developing their own infrastructure to clear through CLS, on top of the $5 million already invested per shareholder, is "at least that much again", according to HSBC’s Bolton.

It may also be cheaper for banks to go through the biggest clearing banks than use their own systems, even if they did develop the infrastructure. Bolton said a bank transacting 800 trades a day through CLS might be charged $3 per trade directly through CLS. "If you piggy back on the back of us you could be paying $1.75 to $2 per trade," he said, based on HSBC putting through 3,000 trades a day with CLS. "We’re prepared to pass on our savings to our customers."

In addition to Citigroup, HSBC and UBS Warburg, around a further nine CLS shareholders are now contending for third-party CLS business, including Royal Bank of Scotland, Deutsche Bank, Barclays Capital, ABN Amro, CSFB, JP Morgan Chase and Bank of America. More CLS shareholders are likely to join them, said officials.