In foreign exchange, it's dealers' choice

CLS's decision to join forces with Icap to launch its FX trade aggregation service raises many questions. Regardless, it's still another score for Traiana.

A profit-sharing venture with Icap indicates a preference by CLS for the London-based interdealer broker, at the expense of other post-trade service providers. It also immediately places a question mark over its treatment of the Chicago Mercantile Exchange (CME).

According to a market source, part of the new CME clearing service is meant to include some form of a relationship with CLS, which now seems unlikely, particularly given the need to generate profits for CLS's JV. If that is the case, it would be the second time in the near past that the CME has missed out on an opportunity. The first being when it attempted to arrange a pre-settlement netting feature for trades over its JV platform with Thomson Reuters, FXMarketSpace.

To be clear, FXMS did ask the industry utility for a service that it did not provide its own members, and CLS indicated it could have the same service, that is, gross input. CLS says that, additionally, the CME only approached CLS after announcing its new exchange, when it asserted it could submit net without first having that discussion. Despite this, CLS did provide a gross settlement service to the platform for well over a year. This was a case of providing an equivalent service to every participant, no more no less.

CLS says it still hasn't been approached by CME about its current initiative.

In discussions, it seems that whether CLS is favouring one or the other is entirely beside the point. Certainly over the past year or so it has become painfully obvious that, unless dealers support an initiative, it will never really get off the ground. And CLS - despite its ownership structure - has first-hand experience of this. Despite calls to accept netted trades for settlement from a small but significant group of settlement member banks, CLS refused to evolve its charging structure from the gross ticket model - a decision coming from the board, which also included this group of banks.

The consequence was that these dealers began speaking to the likes of Traiana and Options Computers, who went and developed ticket netting systems anyway, in the form of NetLink Dealer, for example. Even FXMS launched a settlement solution called FXSettle.

In the end though, it looks as if the dealers are getting what they really want.

Comments? Email saima.farooqi@incisivemedia.com