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Poornima Mohandas

CCIL has invited bankers to a presentation on the same in the second week of January to get their feedback and plans to launch operations by first week of April 2004.

Mumbai , Dec. 30

THE Clearing Corporation of India is soon to extend its settlement services for cross currency transactions at the rate of $3-$4 per transaction. It currently acts as a settlement agent for all dollar-Re transactions in the domestic foreign exchange market.

Clearing Corporation of India (CCIL) has received an in-principle approval from the regulator and expressions of interest from 20-odd banks in India to avail themselves of the services of `Continued Linked System (CLS)', an international system devised for cross currency settlement. The interested banks included both public and private sector banks, said a CCIL official. Currently, cross currency transactions take place between the buying and selling banks with no intermediary involved.

How CLS will work for Indian banks: CCIL will work as a third party and aggregate all settlement details and route it through the Amsterdam-based, ABN-Amro Bank, who is a direct member of the international system, CLS. The Indian banks will be fourth party members and will avail themselves of the service at $3-4 per transaction.

"The charge has been fixed following negotiations with ABN-Amro Bank and includes hardly any margin from CCIL's part,'' said the official.

Commenting on the pricing, said the treasury head of a bank, "The pricing seems a little on the higher side as of now, but hopefully as volumes increase, the price will come down. At present, the charges incurred by banks for every cross currency settlement is two sets of nostro charges, which typically varies between $1-$5 on each leg.

However, the cross currency market in India, i.e., transactions outside of the domestic currency, is very small compared to the total foreign exchange transactions of banks operating in the country. While there is no published data totalling the numbers involved, market estimates put cross currency transaction volumes at $300-$500 million per day. This is a miniscule compared with the $2-$3 billion that gets transacted in the active spot dollar-Re market. While welcoming the system, bankers said: "we have not examined CLS in detail yet."

CCIL has invited bankers to a presentation on the same in the second week of January to get their feedback and plans to launch operations by first week of April 2004.

Said Mr Moses Harding, Executive Vice-President, IndusInd Bank, "CCIL's objective is to bring down systemic risk say in the case of a bank failure either domestic or overseas. By ensuring settlement and payment versus payment CCIL will eliminate settlement risk.''

At present, say for a dollar-yen transaction, there is gap in time between the payment of dollar and the receipt of yen for each party following a deal as a result of the differing time zones of the various financial markets; this gap will no longer exist post-CLS since payment in one currency will be made only against payment in the other, thereby eliminating settlement risk.

There would also be plenty of operational ease and savings, said a CCIL official. Banks need no longer send out hundreds of payment instructions and messages daily for every debit/credit to the nostro account.

A nostro account of a bank is a foreign currency account maintained overseas for both customer and proprietary transactional needs. Banks can also save on nostro and message charges since only a single instruction is required from them, stating the net outflow position in each currency daily.

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