Rabobank to change credit lines post-CLS adoption

Since the launch of the CLS service on September 9 last year, market participants have been looking for signs of divergence between CLS members and non-CLS members. This could manifest itself in two ways -- by banks' favouring trading with counterparties that are also users of CLS or by increasing deal spreads for non-CLS counterparties, so creating a two-tier pricing system.

According to Pablo Vergara, Rabo's head of short-term interest rate products in Utrecht, the former is already beginning to develop. "We have invested in CLS and found that it is a very good system, although it is expensive in terms of initial investment, it is of great value in reducing FX settlement risk," said Vergara. "As a result, we should be favouring counterparties that are going to settle on CLS -- it helps us reduces our credit uses and to manage our settlement exposure more effectively."

He expects other banks to make similar reviews of their credit procedures in the near term. "Some banks have already cut lines to a limited extent, and we expect that to happen more as they reassess the amount of exposure they have on a single name. We will readjust our limits with non-CLS counterparties from September."

Although the emergence of a two-tier pricing system has not yet occurred, according to a recent TowerGroup survey conducted on behalf of CLS (FX Week, April 7), Vergara still expects to see this happen even if not at Rabobank itself. "Non-CLS banks will have to pay a premium to access the larger deals because of the settlement risk of dealing outside CLS," he said. "We would never increase our exposure to a non-CLS bank for a few pips more, but you will see that happening progressively with other banks."