Welcome Guest. | Log In| Register | Membership Benefits
  • Email this page E-mail this page
  • |  Print Print this page
  • |   Bookmark and Share
  • |  icon
  • | 

Bringing Foreign Currency Exchanges Into The 21st Century


This week marked the start of a new system designed to make currency exchanges a real-time process and eliminate the risk of bad trades.

By Eileen Colkin
InformationWeek
September 11, 2002 12:00 AM

Foreign currency exchanges--amounting to $3 trillion in transactions a day--used to be a two-day-minimum process that was loaded with inefficiencies and risks for the financial institutions conducting the transactions. But Monday marked the first day of a new system designed to make it a real-time process and eliminate the risk of bad trades.

The project's been in the works since 1999, when the world's 20 largest banks decided they would create CLS Bank, a "utility" company whose mission was to create the Continuous Link Settlement. CLS became a financial institution that meets the Federal Reserve's requirements to operate as a bank, but its primary goal is to develop a way for both sides of a foreign exchange be done simultaneously. The banks backing CLS forked over $300 million for the project.

More Software Insights

White Papers

Webcasts

Reports

Videos


Marketbright helps non-technical marketing managers run Web sites, send mail blasts and generate leads ClearApp helps manage complex SOA-based environments A 30-second description by CEO David Fox of Agistix, a vendor founded in 2003 that focuses on logistics and supply chain management software as a service. Agistix, according to Fox, helps customers
ClearApp helps manage complex SOA-based environments
So CLS has done what many thought was the impossible: It linked seven of the world's largest central banks and 39 other member banks, which will use a centralized system for real-time gross settlement of foreign exchanges. This is the first time the central banks have been linked in real time. During the next year, more central banks are expected to be linked to the system.

Here's how it works. Say Citibank wanted to trade $100 for 75 Swiss francs. Historically, it would have had to search for a trading partner at banks around the world, and the two would have reached an agreement to execute. That deal would have been cleared by the central banks involved, and each bank would have to send its money to the other. The deal wasn't "settled" until both sides received their money. That usually took two or three days and came with risk for both parties. Suppose the foreign bank went out of business after the buying bank had sent the money? That money was gone forever. This happened in 1974 when the German bank Bankhaus Herstatt collapsed, leaving banks that had made Deutsche mark payments in the German time zones without any reciprocated dollar transfers from Herstatt. (It, in fact, gave rise to the term Herstatt risk.)

Now, not only is the exchange done instantaneously, but because all the parties are linked, CLS can match the traders automatically. If, for example, Citibank wants to buy some francs, it simply enters a bid into the system and searches for a selling bank. The launch of CLS is a long-awaited victory for the industry, says Michael Knorr, global CLS product management head at Citibank, which processed $2.5 billion in the first day of automated trading. "The efficiency gain is that we have fewer payments to do and the reconciliations will be fewer," he says. "And we'll have real-time information available during the process--not just at the end of the day or the next day--so we can be more proactive on what is happening."

This project has not been without its glitches--the original launch date was January 2001. It was delayed because neither CLS nor IBM (the lead technology provider) anticipated the integration issues, and the original timetable was overly aggressive, Knorr says.

Then it was supposed to launch in October, but 9/11 brought attention to the need for even more security and resiliency than had been anticipated. CLS has triplicate real-time backup, and the Federal Reserve set the security requirements that need to be met before any bank can link to CLS.

For the member banks, this is not only a means of eliminating risk in foreign exchanges and increasing efficiency in trading, it may also create new revenue. There are plenty of smaller foreign exchanges that aren't linked to the system--the member banks can sell their access to the real-time trades as a service and become a third party on the smaller banks' transactions (and charge for that). CLS needs that to happen, says Fritz McCormick, an analyst with Celent Communications, because it won't be as relevant if all foreign-exchange orders don't pass through it. But linking smaller banks individually will take a long time. Each will have to resolve the integration and regulatory issues that the bigger banks faced, a costly endeavor that some may not want to undertake.


Subscribe to RSS


Advertisement

CAREER CENTER
Ready to take that job and shove it?



TechCareers

SEARCH
Function:

Keyword(s):

State:
SPONSOR
RECENT JOB POSTINGS
CAREER NEWS
10 Search Engines You Don't Know About
Go beyond Google and get vertical. These specialized search sites will help you find the business information you need -- fast.

Yahoo Profits Fall 23%, Cuts 1,000 Jobs
Ari Balogh was named to the post of chief technology officer as the companys for a "realignment" of employees.

More articles from our career center





Subscription Info
Apply for a free 52-week subscription to InformationWeek (a $199 value)

Last Name:

First Name:

Title:

Company Name:

City:

Business Address:

Zip:

State:

Email Address:

NOTE: Offer valid for U.S., U.S. possessions, & Canada only

            

Join economist Chris Cornell and 3 CIOs in an Exclusive Online Exchange for Senior IT Executives: Using IT to Drive Value in a Turbulent Economy. November 5th only.