Clearing firms may choose to use CLS settlement for their euro/U.S. dollar-denominated deliveries beginning with the September delivery. CME intends to make the CLS settlement method available for other CME foreign exchange products at a later date.
"For more than 30 years, CME has successfully managed the currency delivery process on its foreign exchange contracts - but making our delivery process more like the interbank FX delivery process that many global banks already have in place will simplify the process and result in potentially significant cost savings," said CME Chairman Terry Duffy. "This important agreement with Citibank will enable us and our firms to move to a more efficient settlement process."
"We are pleased to receive this appointment from CME and with this step have extended the CLS process into a new product space. Now, Citibank®CLS Settlement Services can provide the same efficient and virtually risk-free settlement for foreign exchange futures as it does for other FX transactions settled through CLS," said Michael Knorr, Global Product Manager for CLS Settlement, Citigroup. "Although many CME firms have direct CLS access, not everyone will be able to support their futures operations initially. CME firms who are not direct CLS members may establish a relationship with a CLS service provider, such as Citibank, to benefit from the new delivery process," he concluded.
The new CLS delivery procedure reduces the time required for the actual currency delivery to the five-hour period when central banks in the participating CLS currencies are open, compared to the current 12-hour period between the time Orders-to-Pay are sent to agent banks and the time funds are wired from customers' payment accounts to the appropriate receiving accounts. Currently, for example, the process of paying Japanese yen begins at 8 p.m.(Chicago time) on the day prior to delivery, with dollar payment for the same transaction being paid at 8 a.m.on the day of delivery.
CME expects its members to realize cost savings through the elimination of an Order-To-Pay issued by a firm's bank and CME, the ability to net money flows at the bank level, the streamlined processing - which will be similar to interbank FX transactions - and reduction of the likelihood of misrouted transactions by handling disbursement at the CLS service provider level.
Firms may select the timing of their migration to the CLS system, or may continue to use CME's current delivery procedures, which are not being eliminated.CME's Clearing House is wholly owned by Chicago Mercantile Exchange Inc. As of March 31, 2003, the CME Clearing House acted as custodian for approximately $28.5 billion in performance bond assets deposited by its clearing firms, and during the first quarter of 2003, moved an average of approximately $1.5 billion a day in settlement funds through its clearing system. CME's Clearing House currently guarantees the performance of cleared contracts with a financial safeguards package of approximately $3.4 billion.
