A new settlement system for the multitrillion-dollar global foreign exchange market is due to go live later this year, four years after the IT contract for the system was first awarded.
The Continuous Linked Settlement (CLS) system is provided by CLS Bank, an industry consortium of 67 leading banks, including Goldman Sachs and Citibank.
One of the biggest IT projects in financial services over the past five years, it aims to provide a simultaneous settlement service for global foreign exchange transactions between banks, slashing the time it takes to settle currency transactions from days to hours.
In the current system, two banks in a currency transaction can pay on different days, due to time zone differences and trading hours, which can lead to cash-flow uncertainties for the banks. The new simultaneous settlement system should dramatically reduce the risks that banks face during currency transactions, which can involve hundreds of millions of pounds.
"This is one of the largest changes in the way banking works in hundreds of years," a spokesman for CLS Bank said.
The system is currently undergoing intensive live tests before being fully rolled out to the 67 CLS bank shareholders later this year. Analysts estimate the total cost of the project's IT to be tens of millions of pounds.
However, progress has been sluggish. The project has faced repeated delays and is years behind its original schedule. For IBM, the project's technology supplier, it has been a testing four years.
The technology itself, based around standard messaging formats and data gateways, is relatively straightforward. A far greater challenge appears to have been getting the CLS member banks to agree on common standards for the new system, and a timetable to deliver it.
The system was originally due to go live in 2000 but this date was put back to 2001 under a revised timetable. The launch of the system was delayed again last year to allow IBM to conduct further testing on the technology.
CLS cited the complexity of the project when asked why it has been delayed so often. It added that the commitment from its member banks has never been in doubt. However, one CLS insider said, "IBM probably had not appreciated the scale of this on the financial industry. However, once it did, from that point it really did begin to pull out all the stops. It was a big learning curve for IBM."
Although the strain of forging agreement on the project between nearly 70 banks has slowed down progress, some analysts believe IBM could have managed it more effectively. "I think it has had a slightly detrimental effect on IBM's image in the financial markets industry," said Daniel Mayo, lead analyst in the financial services group at Datamonitor. "I think IBM did underestimate the size of the challenge in doing this project."
Both CLS and IBM argue that it would be folly to launch the settlement service if any doubts remained over the technology's effectiveness. "We are talking billions of dollars in transactions and there is no leeway for error," said a spokesman for IBM. "We need to ensure there is absolute confidence that the security and resilience criteria have been met."
The CLS project is certainly an ambitious one, although real-time settlement services such as Target, the European system for processing cross-border payments, have already been rolled out, and with fewer delays.
It will also require a substantial amount of extra work for the IT departments at banks that use the service.
CLS will provide a gateway - or software module - to link customers with the settlement service. The banks will have to integrate the gateway, supplied by IBM, with its IT systems and test the new interface thoroughly before using it for live trades.
The total IT cost of this integration for a large bank could be as much as £5m to £10m, according to industry experts, although the large investment banks are well versed in these integration demands.
The launch of the CLS service will be watched closely by both IT professionals and traders in the City. The service has the potential to reduce risk across the financial markets and streamline communication between global banks. However, it is also well overdue, and any crashes or software glitches could cost billions of pounds. The stakes for an IT project could not be much higher.
What is Continuous Linked Settlement?
Continuous Linked Settlement (CLS) is a settlement bank, based in New York, US. It is made up of financial institutions including Citibank, Deutsche Bank and Goldman Sachs. It also has the backing of seven central banks.
It will offer a simultaneous settlement service for global foreign exchange transactions. The foreign exchange transaction market has an average daily turnover of more than $1tn.
The new service is the banking industry's response to regulator concerns about risks inherent in the foreign exchange market. Currently, foreign exchange transactions can take at least two days before they are settled (when each partner in the transaction has received payment).
This time lag between the transaction and settlement - due largely to the different time zones and trading hours of the different currency markets - has the potential to destabilise financial markets.
What happens, for instance, if a bank goes bankrupt before all the billions of dollars worth of currency in a transaction with another bank can be completed? The failure could have a domino effect, toppling other financial institutions across the world. The collapse of Barings Bank in 1995 highlighted the dangers of this ripple effect.
The CLS service promises to settle currency transactions in a period of five hours. Customers will also be able to watch transactions being processed in real time.
This should reduce the risk that banks face when executing foreign exchange transactions, by settling both sides of a trade at the same time, regardless of time zone or location differences between the parties.
The technology behind CLS
IBM has been responsible for developing the technology that underpins the Continuous Linked Settlement service.
This IT infrastructure is based around Unix and IBM server clusters. Each bank installs a software gateway, given to it by CLS/IBM, to link it into the settlement system. In case of any technical glitches, each member bank also has a secondary gateway to fall back on.
The central part of the CLS service, based on Unix servers, has two sites running in parallel to further bolster the system's resilience. Should the servers in these two sites fail, there is also an online site, which can be switched to as a last resort.
Timetable of the IT contract behind CLS
1998: CLS Bank awards contract to build new settlement service to IBM
2000: Original launch date for CLS revised to 2001
2001: Revised date for CLS system to go live pulled. In a statement CLS says IBM has recommended further testing before system goes live
2002: System integration and live trails of CLS system
Q3 2002: System due to finally go live. All 77 member banks of CLS are committed to using the system, with others expected to follow.