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FX Trading - CLS minimizes counterparty settlement risk. [Copy link] 中文

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Post time 2006-2-24 15:24:52 |Display all floors
On a normal day, the average turnover in global FX transacttions is approximately US$2 trillion, that's $2,000,000,000,000

Before CLS came along, each leg of the trade was paid seperately. We have here a systematic risk that the counterparty will default after an irrevocable payment by a bank. Taking into consideration the time-zone differences, this heightened the risk of one party defaulting. This is the "temporal settlement risk". This risk is very real, as exemplied by the Herstatt collapse.

On 26 June 1974, the German authorities closed Bankhaus Herstatt. On that day, some of Herstatt's counterparties had irrevocably paid Deutsche marks to Herstatt but had not received US dollars in return because the US market has just opened for the day. Herstatt's correspondent bank suspended US dollar payments from the German bank's account. Banks that had paid Herstatt became fully exposed. Through the knock-on effect, other banks in New York refused to make payments on their own until they received confirmation that their counter-value had been received. Over the next few days, the amount of gross funds transferred declined by an estimated 60%. There were other similar cases e.g. Drexel Burnham Lambert Trading, BCCI, Baring Brothers etc

In the mid-1996 the G20 banks put forward a payment-vs-payment solution wherein both legs of an FX transaction are settled simultaneously and irrevocably. In 1997, the CLS Bank International was set up for this purpose. In 2002, the CLS Bank went into operation and started settling transactions involving USD, EUR, JPY, GBP, SFR, CAD and AUD. The list has since been expanded to fifteen traded currencies.

The member list is extensive, they come from the Netherlands, Australia, Italy, Spain, USA, Japan, UK, Germany, France, Switzerland, Denmark, Singapore, Germany, Luxembourg, Norway, Belgium, South Korea, Japan, Canada, Sweden, and South Africa. Have I left anyone out? I think that's the complete list.

Following diagram shows the parties involved in the payment-vs-payment process.

References
http://www.cls-services.com/sect ... CEC&crumb=about
http://www.hsbcnet.com/hsbc/home ... s-linked-settlement
http://www.bis.org/publ/qtrpdf/r_qt0212f.pdf
http://www.bankofengland.co.uk/publications/news/2004/167.htm
CLS.gif

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Post time 2006-2-24 15:29:19 |Display all floors

Fifteen currencies eligible for CLS settlement

US Dollar, Euro, UK Sterling, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong Kong Dollar, the New Zealand Dollar, the Korean Won and the South African Rand.

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