Continuous Linked Settlement (CLS)
Tue, Apr 15Continuous Linked Settlement (CLS) is a cross-border payment system designed for the settlement of foreign exchange trades, effectively eliminating settlement risk.
Standard foreign exchange transactions carry a settlement risk. This risk arises because the exchange of the two currencies is not simultaneous; thus, the party selling a currency before receiving the purchased currency from the counterparty faces potential exposure to risk.
CLS mitigates settlement risk through a payment-versus-payment mechanism (PVP), which ensures that payment is made only if the corresponding payment is received. On the settlement day, each party involved in the trade submits the currency they are selling to CLS. CLS then disburses the purchased currency only after confirming receipt of the sold currency.
In essence, CLS functions as a reliable third party in the settlement process. It is crucial to understand that CLS does not act as a central counterparty; the trade remains between the two original counterparties.
The CLS system is operated by CLS Bank International, which is exclusively focused on settling foreign exchange trades. Established in 2002, CLS Bank is owned by some of the largest banks in the world.
Located in New York, CLS Bank serves as a limited purpose bank for settling foreign exchange transactions, with its primary operations based in London. Although CLS Bank is headquartered in New York, it holds accounts in various countries corresponding to the currencies in which it settles trades.
All transactions are processed through the bank within a single five-hour window each business day. Currently, CLS settles payment instructions in 18 different currencies for over 70 settlement members and more than 25,000 third-party customers.
On average, CLS settles $5.3 trillion in payments each day. It operates under the regulation and supervision of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
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