The common line is that CLS is a bad tax on the industry and that it is potentially choking growth. In the past, I have criticised CLS for not being transparent about its charges, but this situation has changed, although naturally commercial sensitivities mean it doesn’t always answer my questions. Last year, CLS told me that its ticket processing charges were 40 pence per small lot, which dropped to 25 pence for large volume, and 80 pence to £1.10 for large trades (see You get what you pay for).
This week, I was told by a reliable source that CLS’ fixed costs are around £70 million per year. I’m astonished this is so low, but some back-of-a-fag-packet calculations suggest this figure is accurate. Last year, 55% of the tickets sent to CLS were for small lots. If it had maintained the same tariffs, I estimate its annual revenue, based on average number of daily settlements to June, is around £87.5 million. However, I assume that it has reduced its charges as volumes grow.
Looking at it another way, CLS has 69 shareholders, of which 57 are members. All the shareholders have, I understand, been paid back on their original investment. Despite the moaning about CLS’ costs and the promotion of pre-settlement netting, few of its users seem prepared to pay a fixed fee to fund what everyone agrees is a body that does exactly what it was set up to do. If my figures are accurate, CLS’ members would only have to stump up £1.25 million each a year to fund it. So what is the big deal, especially when it provides such comfort?
The real story is that some of the banks have allowed their businesses to outpace their infrastructure. Now they want a scapegoat for their problems and an easy solution. Attacking CLS is easy. Of course, ripping out and replacing, or simply even upgrading a back office is hugely expensive, and the front end typically receives the lion’s share of IT budgets. But if they are giving away liquidity too cheaply, that is not the fault of CLS.
Last week, when Icap bought Traiana, it claimed that the total cost of ticket processing across assets is $5 billion a year. It believes that more efficient post-trade systems and processes could reduce this by a staggering 60%, or $3 billion. So here’s my suggestion – and I must at this stage point out that I am an Icap shareholder – the FX industry should ask Icap to pick up CLS’ costs, if it allows the netting of trades it does through the company, using Traiana of course. That will lead to a quasi-concentration rule, with EBS the winner, but I’m sure other deals could be done in a similar vein.