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  5. CLS Bank: Worth the Wait?

CLS Bank: Worth the Wait?

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16 February 2001

Abstract

Boston, MA, USA February 16, 2001

?

Despite delays, Celent predicts that CLS will capture a large share of FX Market

In a new report entitled ?, Celent Communications provides a comprehensive analysis of the CLS Bank, a private sector initiative begun by the worlds largest foreign exchange dealing institutions. Its function will be to mitigate settlement risk in the foreign exchange market, which reaches daily volume levels of US$1.5 trillion. CLS Bank, originally scheduled to begin service in October 2000, has now been delayed to November 2001. Even with the delay, Celent expects the Bank to settle almost 50% of FX transactions by 2005.

Settlement risk is the chance that, because of the complex structure and global nature of the market, a foreign exchange transaction is completed by one bank, while a counter party fails on its obligation and the corresponding currency is not paid. Growth in foreign exchange trading volume has created heightened awareness of this risk amongst industry regulators and the banks themselves. However, banks have been somewhat reluctant and slow to implement real change, due to the extensive time and effort necessary to do so.

According to Fritz McCormick of Celent, Foreign exchange settlement risk can threaten not only individual dealing institutions, but the entire worldwide underlying foreign exchange market structure in a domino-like effect. The knowledge of this risk, having been heightened by several financial institution implosions in the last thirty years, has finally caused major dealers to take steps towards settlement risk mitigation. CLS Bank, when it gets off the ground, is the best chance the industry has to cut down settlement risk.

The report includes an overview of the foreign exchange market and settlement risk, as well as a close look at the structure and operations of CLS Bank. A final analysis of CLS Banks future prospects is also included. Members of Celent Communications Wholesale eTrading research service can download the report electronically by clicking on the icon.

A Table of Contents is available online.

of Celent Communication's Wholesale Banking and Institutional Securities & Investments research services can download the report electronically by clicking on the icon to the left.

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