Foreign Exchange Clearing House Opens, Amid Doubts

A new global clearing house built to streamline interbank foreign exchange settlement handled its first transactions last week.

But some bankers wonder whether the London-based Exchange Clearing House Ltd., or Echo, can attract the necessary volume for it to be profitable.

Echo is the first multilateral, multicurrency netting system. Its $38.7 million in start-up costs were shouldered by 15 international banks, including ABN Amro Holding, Amsterdam, and Barclays Bank PLC, London.

In a press release, Echo's chairman, Jos Heijnen said the new clearing house reduces the number of interbank settlement payments by 90% and will "quickly prove to be the cornerstone of the risk management structure of every trading bank."

Echo was created to help reduce settlement risk in cases where counterparties are unwilling or unable to meet the settlement requirements in foreign exchange deals.

Multilateral netting schemes, such as those used at Echo, aim to reduce risk by eliminating the need to deal with multiple transactions individually. Echo will tally a bank's net credits and debits in the bank's currency, and settle the position on the value date.

Echo is one of several bank efforts designed to address this risk. It will compete head to head with Multinet International Bank, which is not yet in production; with FX Net, a London-based bilateral settlement system; and to some extent with the New York Clearing House Interbank Payment System, or Chips. Chips is a U.S. dollar-based multilateral netting system whose daily volumes include foreign exchange transactions.

"We've projected that in a couple of years' time, we'll be doing 25,000 deals a day, which is about 20% of the market," said Graham Duncan, Echo's chief executive officer.

But observers said for Echo to succeed, it would have to siphon considerable business from FX Net, a bilateral netting system which handles about 5,000 trades daily.

Sy Rosen, a vice president of payment systems with Citicorp, New York, said many banks already have well-established bilateral relationships with their counterparties and may not want to cut over to multilateral netting arrangements for nominal enhancements to settlement risk.

"We made a decision to focus and emphasize on the bilateral arrangements," Mr. Rosen said.

George Thomas, senior vice president with the New York Clearing House, said both Echo and Multinet are " fledgling operations" that will need time to achieve critical mass. "They may never get it," he said.

Mr. Thomas noted that the most prominent banks in the foreign exchange market, including the biggest American and Japanese players, are not involved with either Echo or Multinet. This is significant in that American, Japanese, and German currencies are used extensively in foreign trade.

The one German bank that is involved with Echo, Commerzbank, is not a large foreign exchange bank, Mr. Thomas said.

However, Mr. Duncan said Echo has been in discussions with several banks of significance. He declined to name them but said, "I think as they see us go live, that will give a renewed impetus to the discussions." He also suggested that the foreign exchange market - in which an estimated 125,000 trades worth $1 trillion occur daily - offered room for more players.

Garret Glass, the chairman-designate of New York-based Multinet and a senior vice president of First Chicago Corp., applauded Echo's launch.

"Echo's start-up is good news for us," Mr. Glass said. "Finally, we have evidence that multilateral netting is here and that the problems have been solved."

Multinet, which is owned by eight U.S. and Canadian banks, including Chase Manhattan Corp. and First Chicago Corp., is still awaiting approval from the Federal Reserve Board and the New York State Banking Department.

But Mr. Glass acknowledged the competition developing among the various groups, saying, "Everybody wants to grab the same stream of revenue. "

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