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® CLS and the CLS Logo are registered trademarks of CLS UK Intermediate Holdings Ltd © 2009 CLS UK Intermediate Holdings Ltd.
www.cls-group.com
Maintaining trust in international transactions - the
CLS experience
Peter SlaterDeputy CEO, CLS Group
2
What is CLS?
CLS Bank operates the world’s largest multi-currency cash settlement system, settling payment instructions for over 50% of the world’s daily
FX transactions.
CLS Settlement is the only means by which settlement risk can be eliminated with finality using a unique combination of payment versus
payment in central bank funds, multilateral payment netting and a standard legal framework, supported by a robust and resilient
infrastructure.
3
CLS - The market standard
Eliminates FX settlement risk in payment instructions for trades executed in seventeen major currencies and six instruments:
FX spot, FX swapsFX forwards Non deliverable forwardsFX option exercises Credit derivatives
Settles matched trades on a payment versus payment (PvP) basis- Guarantees return of principal amount in the event of counterparty failure
Multi-laterally nets all cash obligations per value date
Settlement is final using central bank funds and operating within a standard legal framework & operating rules
Supported by a robust and resilient infrastructure - One of six critical market infrastructures overseen by FRBNY
4
CLS milestones
September 2002: Live with 39 Members and 7 currencies
September 2003: 4 more currencies added ( to 11)
February 2004: First Fund FX transaction settled
December 2004: 4 more currencies added ( to 15)
November 2007: Number of third party participants exceeds 2000
September 2008: Record volume - over 1.5 million instructions in one day
December 2007: NDF service goes live
December 2007: Credit derivatives settlement goes live for DTCC
March 2008: Record value settled - $10.3 trillion
December 2007: Full “out of region” resilience
May 2008: Live with Israeli Shekel and Mexican Peso – 17 in total
5
CLS passing the test in recent market events
W/c 15 September: exceptional sustained volumes and values - Settlement of USD 26.5 trillion and 4.4 million instructions for the week
Collapse of Lehman Brothers:- CLS community worked together - Minimal number of trades were rescinded/withdrawn - All Lehman trades in CLS were settled - some for very large amounts
Additional significant trading activity (daily average of 879K).
Increased level of AIG related instructions submitted on peak volume day
New peak volume day of 1.5 million instructions on 17 September
CLS worked exactly as designed, huge settlement risk values eliminated
6
CLS volumes and values
Feb-08Mar-08
Apr-08
May-08
Jun-08Jul-08
Aug-08
Sep-08Oct-0
8
Nov-08
Dec-08Jan-09
Feb-09
100150200250300350400450500550600650700750
Aver
age
daily
vol
ume
settl
ed
(Sid
es 0
00's
)
$3 trillion daily($10.3 trillion peak day)
579,000 instructions daily(1,554,166 peak day)
Volume
Value
Feb-08Mar-08
Apr-08May-0
8Jun-08
Jul-08
Aug-08Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
100015002000250030003500400045005000
Valu
e ($
Bn)
7
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Jan
04Fe
b 04
Mar
04
Apr 0
4M
ay 0
4Ju
n 04
Jul 0
4Au
g 04
Sep
04O
ct 0
4N
ov 0
4D
ec 0
4Ja
n 05
Feb
05M
ar 0
5Ap
r 05
May
05
Jun
05Ju
l 05
Aug
05Se
p 05
Oct
05
Nov
05
Dec
05
Jan
06Fe
b 06
Mar
06
Apr 0
6M
ay 0
6Ju
n 06
Jul 0
6Au
g 06
Sep
06O
ct 0
6N
ov 0
6D
ec 0
6Ja
n 07
Feb
07M
ar 0
7Ap
r 07
May
07
Jun
07Ju
l 07
Aug
07Se
p 07
Oct
07
Nov
07
Dec
-07
Jan
08Fe
b 08
Mar
-08
Apr-
08M
ay-0
8Ju
n-08
Jul-0
8Au
g-08
Sep-
08O
ct-0
8N
ov-0
8D
ec-0
8Ja
n-09
Feb-
09
Bank: 322 Corporate: 27 Non-Bank Financial: 62 Fund: 4275
Total: 4686
CLS participation
7060
23
010203040506070
Shareholders Members Third PartyProviders
8
2008 achievements
Reserve Bank of New Zealand live as first Central Bank Member
Bank of China HK, Shinhan Bank, Bank Leumi and Bank Hapoalim live
NDFs – 15 banks completed trialling required to go live
CLS settled over 142 million instructions with a value of over $1
quadrillion during the year for the first time
Increased capacity to process peak instruction volume of two million.
100% settlement of all transactions submitted to CLS in 2008
9
The Structure
CLS Group Holdings
Representative officeTokyo
CLS Services London
CLS Bank International New York
Settlement Member User Member
Third party service provider
Third parties
Shareholders
10
CLS governance
CLS service is delivered by CLS Bank
Co-operative utility – charges for account and transactions
Pricing and product strategy determined by the Board in conjunction
with working groups covering products and pricing
Regulated by Federal Reserve and reporting to the Committee on
Payment and Settlement Systems (CPSS) Board
11
How CLS service works
CLS is a Bank
Holds accounts with all central banks (17) of the currencies settled
Settlement Members (58) each have a multi-currency account with CLS
Linked settlement takes place on the books of CLS
Members have to pay in their net short positions each day
Members receive back their net long positions
CLS Bank opens and closes each day with a zero balance on all accounts
Members offer CLS access to their own customers (CLS third parties)
12
Settlement Accounts with 17 central banks
13
06:30 07:00
Fundingcompletion
Funding &settlement
On-going submission of instructions
How CLS works - overview
09:00 12:00
14
CLS operational timeline
15
CLS Value: Members
OperationsEfficiency
Improved TradingCapacity
ReducedFunding
RiskElimination
RISK ELIMINATION Elimination of settlement risk Reduced payment risk
through reduced number of pay ins and pay outs per day
Reduced Operational Risk through extensive operational controls & market standardisation
IMPROVED TRADING CAPACITY
Maximisation of trading capacity and limits
Expanded range of counterparties
Capacity to grow
CLSValue
OPERATIONS EFFICIENCY Zero fails -reduced costs on
recons, investigations Reduced number and cost of
payments Elimination of settlement
failure and cost of interest claims for late settlement
REDUCED FUNDING Gross funding levels
reduced by 95% for all CLS currencies
“Best in class” cash forecasting, faster matching and position reporting
16
CLS Bank’s currency eligibility requirements
Currency Minimum sovereign rating of BB-/Ba3 Convertible and transferable
Strong support from the local Central Bank
Legal Can achieve finality of settlement and pay-ins Acceptable Rule of Law
Stability of the local banking system
Can meet operational standards Timed pay-ins via RTGS SWIFT standards
Business case acceptable for both CLS and local market
17
Benefits of currency inclusion in CLS
Should a currency wish to join CLS, it can benefit in several ways:
Supports the internationalisation of the currency
Positions the currency as one of the most important settlement
currencies in the world
Local banking system will receive the risk, liquidity and efficiency
benefits of CLS participation
Potential benefits to local economy through increased cross border
trading and investment
18
FX market developments
Sell side consolidationInterbank share of trading declining; 43% of global FX turnover in 2007 – 53% in 2004.*
Expanded buy side activity driving volume growthShare of global FX turnover between banks and other financial institutions, including hedge funds and pension funds, rose from 33% in 2004 to 40% in 2007.*
Emerging market currencies growth19.8% of global FX turnover in 2007 - up from 15.6% in 2004.*
Computer based trading showing strong growth, higher volumes, lower average values
Major market focus on credit and settlement risk*Source: BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007
19
Looking to the future
Stay the standard for FX settlement – the ‘one stop shop’ Support volume growth – aggregation industry solution Increase currency coverage
2010: Chile, Turkey2011: Brazil & Thailand
Increased participation
Other potential services:Locally Settled CurrenciesLiquidity management and same day settlementExplore enhanced risk mitigationInformation services
20
Looking to the future
Value based pricing evolution
Become the standard for NDFs and option premiums
Meet market needs for cash settlement from credit derivatives in partnership with DTCC
Deliver sustained increase in shareholder value
®
® CLS and the CLS Logo are registered trademarks of CLS UK Intermediate Holdings Ltd © 2009 CLS UK Intermediate Holdings Ltd.
www.cls-group.com
Maintaining trust in international transactions - the
CLS experience
Peter SlaterDeputy CEO, CLS Group
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