Interbank foreign exchange settlement service CLS Bank is to extend its operations to cover the 10 per cent of foreign exchange deals currently conducted by global custodians on behalf of fund management clients.
The CLS Custody Working Group, representing 23 banks, has agreed enhancements that will integrate the custodian's fund identifier into the instructions sent to CLS, enabling continuous linked settlement of transactions conducted on behalf of investment funds.
CLS Bank, launched on 9 September, reduces temporal foreign exchange settlement risk and is already settling over US$ 300 billion in value per day. Currently the service settles FX transactions executed between CLS Bank Settlement Members or their customer banks. However, a significant proportion of the US$ 1.2 trillion a day FX market are transactions settled by custodian banks on behalf of investment fund customers. The Bank for International Settlements estimates that 10% of all FX transactions are related to cross-border securities trading and that this source of activity is steadily increasing.
Suzanne Labarge, chairman of CLS Group, comments: “Cross border securities trading is accounting for a growing proportion of FX transactions and the straight through processing and elimination of the associated risk involved with these transactions is a priority for the market as a whole."
The CLS Custody Working Group is an industry body set up to address the issue of custody transaction settlement and to find a solution. CLS Bank says it will work to implement the change with a view to introduction by the end of 2003.
CLS Group shareholders offering custodial services together represent a significant proportion of the global custody market, which is estimated at having over US$ 50 trillion of assets under management.