Deutsche Bank road tests its cash settlement system

Asian banks get a taste of Deutsche''s third party continuous linked settlement service called db-CLSLink.

Seven months before the global launch of the Continuous Linked Settlement (CLS) initiative, Deutsche Bank has started to demonstrate its clearing capabilities to third party banks with the roll out of db-CLSLink. The payment vs payment system which helps to eliminate the cash settlement process for foreign currency trades will be offered to Deutsche's third party banking clients in an electronic platform, and eventually on the web.

The db-CLSLink system is designed to give smaller domestic banks access to CLS services without requiring them to become a direct CLS member.

CLS, a global initiative sponsored by 70 shareholder banks, is due for launch in July 2002. Once it is up and running, member banks will put details of their foreign currency trades directly into the CLS system, CLS will then match and settle the trades, netting positions in a five-hour window in each 24-hour period.

Deutsche Bank is one of the 20 founding-member banks in the CLS network and, like its partners, paid $5 million to join the club. Most of this equity has been spent on creating the system which is being developed by IBM. The development process has taken longer than expected with many delays pushing back the launch date, but member banks are now confident that the July 2002 target can be hit.

In the beginning, CLS will process seven currencies including US dollars, euros, sterling, Swiss francs, Canadian dollars, Australian dollars and Japanese yen. Other currencies like the Hong Kong dollar and Singapore dollar are likely to be added in 2003.

John Ball, head of financial institutions sales in Asia for Deutsche's cash management operation, says the db-CLSLink service will streamline foreign exchange settlement for its banking clients in Asia. "The problem with the way foreign currency settlement works now is that you have to payout before you receive cash back," says Ball.

db-CLSLink allows third party banks to copy their SWIFT confirmations to Deutsche Bank and then the bank will act as a settlement agent through the CLS system. The netting service will reduce clearing fee expenses for third parties.

"This system has a number of benefits for third parties. First, it condenses down the number of settlements needed to balance the books, it also reduces the settlement risk and can increase operational efficiencies and the efficient use of liquidity."

Ball says many banks in Europe have already signed up with Deutsche Bank for the third party service. Banks in Asia are interested but are taking a "wait and see approach", particularly until some Asian currencies are added to CLS.