A leader in the provision of cash management services to financial institutions and companies in Asia, JPMorgan is at the forefront of the introduction of the global Continuous Linked Settlement (CLS) initiative. Due for launch in the third quarter of 2002, CLS promises to remove the risk in settling cross border foreign currency transactions by providing instantaneous settlement of several key currencies through a network of member banks linked electronically around the globe. JPMorgan is one of 70 shareholders in the initiative and will be rolling out the CLS service to its clients in Asia and the rest of the world.
"JPMorgan is a major trading bank in payments and the foreign exchange markets putting us at the centre of CLS," says Stephen Street, vice president of global clearing for the bank based in Singapore. "We have a substantial core banking business in US dollars in Asia and work with some of the biggest financial institutions in the region." And while on the surface CLS appears to be a tool that directly benefits the banking community, Street says the removal of settlement risk in forex transactions is something corporate treasurers should be acutely aware of when selecting a cash management provider. Traditionally corporate treasurers have selected their FX counterparties based on specific credit criteria of which settlement risk was a very small component , with CLS they would be wise to also focus on the liquidity being available at the required moment to settle their trades.
"To be a settlement member of CLS you need to have the liquidity available to settle trades as quickly as possible," says Street. "Only large global banks such as JPMorgan can truly claim to have this level of liquidity. This is something that our large multinational corporate clients value in their relationship with us."
In its initial phase, CLS will handle the settlement of seven currencies including the US dollar, UK sterling, Australian dollar, Japanese yen, Canadian dollar, Swiss franc and the euro. Later other currencies such as the Hong Kong dollar, Singapore dollar and New Zealand dollar will be added to the mix. It is also expected that once the system has been established and operating successfully for some time , CLS will look to include other transactions such as Money Market and Derivatives in the settlement cycle.
In preparation for the launch, JPMorgan has been developing customized technology platforms to allow clients to monitor the progress of their transactions through an easy-to-use web-based system. "We expect clients will continue to use SWIFT to initiate trades through CLS but they will use our proprietary browser to track transactions," explains Street, who says JPMorgan has been working with systems developers ACI Worldwide for the past year to perfect the web platform. "CLS is a real-time active event which means treasurers want to have access to a desktop tool to receive reports on the status of their trades."
Another area of development is JPMorgan's provision of third party CLS services for correspondent banks that not full members of the CLS initiative. "We are now talking with several of our correspondent banks in Asia about the provision of liquidity to settle trades, release of long balances to cover short balances, and assistance in managing non-CLS transaction flows," says Street. JPMorgan has already signed third party CLS partnerships with DBS Bank in Singapore, Daiwa Bank and Chuo Mitsui Trust in Japan and several other large domestic outfits. "We will differentiate ourselves through the implementation of our third party offering, our customer service and the reputation that we have in the clearing service," adds Street.