Third-party CLS take-up slows

Take-up of the continuous-linked settlement (CLS) service by third-party banks is slowing as a result of time-consuming back-office changes and a waning sense of urgency, CLS project managers told RiskNews ' sister publication, FX Week .

CLS said a steady stream of third parties is going live on the service - about seven a month since the November 4 third-party launch. But settlement member banks - those that may settle trades on CLS on behalf of other banks - report increasing challenges in taking these third-party clients live.

The main hold-up, said officials at banks such as Citigroup, SG and ABN Amro, is that, in necessitating compliant back-office systems, CLS has acted as a catalyst for many banks to overhaul and centralise IT. And completion of these projects could take months or even years.

Michael Knorr, CLS project manager at Citigroup in New York, said: "Third parties are using the opportunity to re-engineer the back office. Discussions about integration might mean a move to a different back-office system, so that delays the process." Citi has nine clients live and 32 mandates signed for its CLS service.

Yet while back-office challenges are time-consuming, once they are out of the way, the process of linking these third parties to CLS will be much easier, said project managers. Brian Dunnett, CLS product manager at SG in Paris, said the bulk of these decisions will be made by the end of the year, which would clear the way for more third parties to start using CLS in 2004.

But other obstacles also remain. Some third parties have lost the sense of urgency to use CLS because they do not yet see the cost justification. Market participants had expected CLS to result in a ‘two-tier’ pricing system, whereby trades settled on the service would cost less than those settled outside the service, due to banks pricing-in the reduced settlement risk that CLS brings.

"Take-up is slow partly because we’re not seeing the tiered pricing that was hinted at before. It just hasn’t happened," said SG’s Dunnett.

But the settlement banks promoting their CLS services still see plenty to encourage take-up from third-party banks. "There are so many advantages," said Joerg Pinkernell, head of ABN Amro’s CLS development group in London. “Apart from reduced settlement risk, CLS is a reputation issue. It shows that a bank is looking at credit and settlement risk, and is aware of what is going on in the market."