As the global Continuous-Linked Settlement (CLS) Bank, headquartered in New York, moves closer to becoming a reality, financial institutions are finding out what hooking up to the new system is all about.
CLS Bank is designed to take settlement risk out of foreign-exchange transactions, which are usually conducted between parties in different time zones and often take days to complete. The bank would ensure that both parties to a trade are sufficiently funded by monitoring a firms intra-day payments into its account and authorizing the seven central banks, included in its launch, to move funds accordingly.
Actually hooking up to the new creation is a challenge for the large financial institutions that have become full settlement members and are also looking to open a revenue stream by acting as a CLS conduit for smaller firms.
Some firms have decided to go it alone and develop proprietary software for handling CLS linkage requirements while others have opted to rely on a vendor solution for connectivity. A few have decided on a hybrid approach.
One vendor playing in the CLS space is Fundtech, which focuses on global electronic payments, settlement and cash-management solutions for the financial-services industry.
Fundtech, which competes with vendors like Wall Street Systems and Logica, offers Payplus for CLS to integrate a bank's back office with the CLS Bank core system (built by IBM). The technology, according to Moti Porath, senior vice president, global solutions, Fundtech, employs open standards (SWIFT, XML), is browser based, and supports UNIX and NT server platforms. Payplus interfaces use IBM's MQ Series and standard File Transfer Protocol (FTP) technology.
"We provide everything from the confirmation of trades through the matching of trades in CLS Bank," says Porath. "We support CLS Bank settlement members that provide third-party services for trading and settlement."
Porath says some of those third-party-supporting settlement members, which Fundtech calls clients, are: Citibank, Deutsche Bank, Bank of America, and The Bank of New York. He claims 18 banks use Fundtech software for CLS connectivity.
For interested firms, Fundtech provides detailed functional-integration specifications and carries out a gap analysis for a prospective firm to identify which technological holes need to be plugged. The firm then picks and chooses from Fundtech's offerings to differentiate its services from others. Then integration, which is estimated to take between three to six months, can begin.
"We connect to (an institution's) FX back-office system, payments system, accounting system and risk-management system," says Porath, who recommends that firms begin looking into what it will take for them to connect with CLS Bank.
"The most important thing to do is perform an impact analysis," adds Porath. "This is very serious. I think (institutions) are underestimating the complexity of change they need to do in their back office. This is much more involved than meets the eye."