Record Currency Management  

Since launching its Enhanced Fund FX service, CLS Bank International (CLS) has seen a steady increase in the number of users. Now fund managers, pension funds, hedge funds, investment funds and asset management divisions of banks are using CLS to settle payment instructions derived from foreign exchange deals relating to cross-border investment activity.

One user is Record Currency Management (Record), a leading currency management firm managing over $27 billion for clients worldwide. It became aware of CLS in 2003 following discussions on the benefits of CLS with one of its custodians, Northern Trust. By the Autumn of 2004 Record was a live user of CLS.

There were four key reasons for Record’s participation:

1) Best practice
2) Increased control
3) Improvements in operational efficiency
4) Risk reduction

“FX is our business and when we became aware of the existence of CLS we envisaged that it would become the standard for the industry,” states Joel Sleigh, Director of Operations at Record. “As a major player in this industry Record should strive towards the standard. CLS adds another level of control to our trading process and has significantly reduced what we need to do manually which is fantastic. CLS is also risk-reducing for our clients as the potential for settlement errors and the cost of them is eliminated.”

The main impact for Record is evident at settlement time when it has considerably reduced its workflow. The settlement process for non-CLS enabled clients involves a telephone call to each counterparty bank, two days prior to value date, to agree the net currency flows for each client’s accounts. Once amounts have been verbally agreed, instructions are distributed to each counterparty by fax and to each client’s custodian. Depending on the quantity of settlements happening on a particular day this can take a considerable time. Additionally, payments that go astray may not be identified until the day following value date, and then any back valuation or interest claim costs have to be resolved – which takes additional time also for custodians and counterparties.

Record estimates that these and other processes required when settling outside of CLS such as resolving interest claims and maintaining standard settlement instructions amount to over 70 hours per month, time that would be saved if all clients were CLS enabled.

For accounts that are CLS-enabled, these situations don’t arise.

Sleigh explains: “Transactions are matched in CLS at trade date, and at settlement time Record’s system flags the relevant instructions and that’s it. The custodian and each counterparty bank process the settlements without further intervention from Record. This workflow is clearly beneficial to all parties involved, and avoids the risk of additional time commitments if settlements go astray.”

CLS has also allowed Record to gain some additional flexibility in managing counterparty exposures. For the majority of clients Record has counterparty exposure limits which restrict the amount of business with any counterparty, which necessarily impacts trading activity.

“When we do a trade with a particular bank we will look to reduce that exposure to that bank with any subsequent trades that we do,” explained Sleigh. “We do that partly to reduce the settlement risk so that the net settlement when we get to value date is reduced, and partly to manage counterparty exposure. With CLS we don’t have to worry about the settlement risk anymore so if we want to maintain that exposure with that counterparty and open up the business to other counterparties to spread it around then we can do that without being inhibited by the settlement risk.”

Record has a panel of nine custodians of which two are CLS-enabled, and looks forward to the widespread adoption of CLS by the market.

“If we can get more of our clients settling through CLS via their custodians, then it will allow both us and the custodians to reduce the amount of time we are putting into settlements” added Sleigh. “If other custodians were to go live with CLS we, our clients, and the custodians would see dramatic efficiency savings and dramatic risk reduction. It would allow us all to focus on the value-added services to our clients which is what we want to do. Once the top 10 custodians are active then, from my point of view, it should be standard practice for clients with those custodians to settle FX transactions through CLS.”