CLS Bank International has extended the CLS Settlement service to offer a complete straight through process, post execution to settlement, for non-deliverable forward (NDF) foreign exchange transactions.
The service goes live with six NDF-enabled CLS Bank Member banks and one third party customer, and covers 48 reference currencies, with the net proceeds settling in any of CLS Bank’s 15 settlement currencies. The number of users is expected to grow significantly in the early part of 2008 as more CLS Bank Members and their third party customers participate in the service.
NDFs are short-term forward contracts on a thinly traded or non-convertible foreign currency, where the currencies are not physically delivered and instead the profit or loss is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. The CLS service will capture the various instructions for the life of the contract, provide matching and reporting services and settle the net amount in one of the 15 CLS Bank settlement currencies.
Post trade processing of NDFs has traditionally been manually intensive, due to lack of standardisation and use of long-form confirmations. These factors contribute to expensive processing costs of up to $20 per trade, a significant multiple of the cost to process an FX inter-bank trade.
The new CLS Settlement service for NDFs provides automation in an environment where little standardisation or automation currently exists, delivering more convergence and standardisation on a global scale, bringing increased efficiency and resulting in significant reduction in both cost and operational risk.
“For the first time the NDF market will have a comprehensive and standardised processing and settlement solution, all within a robust standard legal framework. CLS Bank has supported the market in the automation of post trade processing for the 15 currencies it settles and the extension to NDFs provides an effective post trade solution for a total of 48 currencies,” says Rob Close, president and CEO, CLS Bank and CEO, CLS Group.