CLS product expansion welcomed

The deal sees the FX settlement system acting as a central settlement service for over-the-counter credit derivatives transactions. The service, provided through the Depository Trust & Clearing Corporation's (DTCC) Trade Information Warehouse, is the OTC derivatives industry's only automated solution for calculating, netting and issuing payments between counterparties to bilateral contracts.

The aim of the service is to reduce operating risks for users by replacing manually processed bilateral payments with automated netted payments. The companies said that, in the first quarterly central settlement cycle for the new service on December 20 last year, the amount of trading obligations requiring financial settlement was reduced by 98%, from $14.3 billion gross in aggregate US dollar terms to $288 million net. Gross settlements by the 14 participating OTC derivatives dealers were consolidated from 340,000 to 123 net settlements. Payments are initially being made in US dollar, euro, yen, British pound and Swiss franc.

CLS said the commercial relationship for settling credit derivatives transactions is with DTCC, which means the instructions settled from the credit derivatives division of a bank cannot be grouped with that of the FX division. Speaking to a member of the FX settlement arm at a dealer, this is not a problem, given the obvious benefits for the credit derivates division and the additional revenue channel the opportunity presents for CLS.

Jonathan Butterfield, executive director at CLS in New York said, while CLS's relationship with the DTCC is that of a service provider, he hopes to create more of a partnership going forward. He said DTCC Deriv/SERV will end up servicing other OTC derivatives for the same members and third parties, and so CLS could be called upon to settle other asset types, and grow the business.

He added that the banks have invested a lot in a multi-currency utility so there are other opportunities with other instruments where they need multi-currency capabilities. On its own initiatives though, after the launch of non-deliverable forwards, the settlement system plans to add options premium by the end of the second quarter or the beginning of Q3.