The volume of instructions submitted through CLS Bank International is predicted to increase 150% by the middle of 2005, according to TowerGroup research.
CLS Bank currently settles on average almost 70,000 payment instructions per day with an average gross value of approximately $800 billion, with over $50 trillion settled to date. According to research among the 40 banking members of the foreign exchange settlement system, it is expected that the total volume will be 100,000 instructions per day by mid-2003 and 150,000 instructions per day by mid-2004. TowerGroup predicts this will grow to 176,000 instructions per day by the middle of 2005.
Settlement member banks have put the introduction of new currencies at the top of their wish list of planned enhancements for the service, followed by provisions for automated settlement, standing settlement instructions and additional matching services.
Risk reduction is the primary motivation for CLS Bank involvement, along with a desire to avoid regulatory intervention in the market. Improvements in STP rates and error reduction were mentioned as an additional motivation by two-thirds of banks contacted during the research. Three-quarters of the banks questioned said that the rate of failed of trades had dropped to zero since the system was introduced.
Front office benefits were also identified, with over half of respondents reporting that CLS had a positive impact on counter-party credit approval processes. Only 16 per cent stated that the introduction of the system had resulted in a change in trading practices.
Ninety-five per cent of CLS settlement members agreed that the provision of third-party services to mid-tier banks offered excellent long-term potential for improved relationships which could be extended to new business areas. The key factors cited as driving the provision of third party services were the cost of establishing the service, the management of third party credit exposure and providing third parties with settlement finality.
Joseph De Feo, CEO of CLS Group, says the research "highlights many opportunities for both the front and back office in participating in CLS, and provides evidence that the benefits of CLS go far beyond risk reduction".
The research was undertaken before the recent technical glitches that affected the CLS settlement window for Australian dollar and Yen payment instructions. Thousands of payment instructions failed to settle on March 26 and banks had to resubmit instructions the following day.
This was a huge embarrassment for CLS and its backers, who have been talking of extending the system to settle money market trades and cross-border payment for securities.
