CLS Settlement for non-deliverable forwards
CLS Settlement brings increased operational efficiency to post-trade processes for non-deliverable forwards (NDFs). Leveraging CLS Bank’s existing service model and infrastructure, it can be implemented with minimal implementation costs for current users of CLS Settlement.
What is an NDF?
An NDF is a cash-settled, forward contract on a thinly traded or non-convertible foreign currency. The currencies are not physically delivered, instead the contract is settled by calculating the difference between the agreed upon exchange rate and the spot rate at the time of settlement for an agreed upon notional amount of funds. One party in the agreement will make a payment to the other party on the basis of the profit or loss on the contract. NDFs are mostly, but not exclusively, quoted and settled in US dollars.
Why are they used?
NDFs have become a popular instrument for corporations and financial institutions seeking to invest in and hedge exposure to foreign currencies that are not internationally traded. NDFs began to trade actively in the 1990s and estimates put the current market at about 10,000 sides a day with 60-80 percent of this said to be speculative trading.
Current processing problems
Post trade processing of NDFs has traditionally been manually intensive, due to lack of standardisation and the use of long-form confirmations. These factors contribute to expensive processing costs of US$20 per trade*, a significant multiple of the cost to process an FX inter-bank trade. * Z-Yen Limited (2004)
Benefits of CLS Settlement
CLS Settlement for NDFs provides automation in an environment where little standardisation or automation currently exists, delivering convergence and standardisation on a global scale, increasing efficiency and significantly reducing both cost and operational risk. Users benefit from a complete straight through process, post execution to settlement, capturing the various instructions for the life of the contract and provides matching settlement and reporting services. The service is available for a wide range of emerging market currencies with settlement of the net amount in one of the 17 CLS Settlement eligible currencies.
The CLS Settlement service is complemented and enhanced by the NDF Protocol managed by CLS which eliminates the need for participating institutions to exchange separate long-form confirmations. The NDF Protocol incorporates the ‘Multilateral Master Confirmation Agreement for Non-Deliverable Forward FX Transactions’ jointly sponsored and published by industry groups (EMTA – Trading Association of Emerging markets and FXC and FXJSC) - in October 2007.
Many of the institutions using CLS Settlement for NDFs have found that CLS has facilitated the elimination of netting agreements, removing the need for many manual and labour intensive processes. Previously they would have verbally agreed bilateral net transactions, which typically involve several calls and a lot of manual processes that require allocation of personnel. Nets would be bilaterally agreed and this required drawing up agreements using expert legal and administrative staff. CLS Settlement for NDFs has allowed many institutions to free up these resources and reduce costs in this area.
The removal of the need for long-form confirmations with CLS Settlement saves a significant amount of time in processing documentation, and the associated time spent following up with counterparties and other manual processes. At times many banks did not receive side confirmations until settlement date. Now with CLS there is a two hour submission best practice, with the ability to track any unmatched items through the real time information provided by CLS. As a result CLS Settlement for NDFs delivers improved oversight of the settlement process and reduces the need for reconciliations.
The combination of greater operational efficiency and oversight and associated reduction in other manual processes resulting from eliminating the need for netting agreements and long form confirmations has given users of CLS Settlement for NDFs some big cost benefits in many areas, including more efficient use of legal, compliance, FX operations and documentation teams within institutions.
For more information email joinus@cls-group.com.