Introduction

Continuous Linked Settlement (CLS) is a multi-currency settlement system for the settlement of foreign exchange transactions on a payment-versus-payment (PvP) basis via a private bank (CLS Bank International; located in New York), which acts as a settlement institution and with which settlement members hold multi-currency accounts. The CLS Group also comprises CLS Group Holdings AG (located in Zurich), which has 79 shareholders from the banking industry, and CLS Services Ltd. (located in London), which serves as a data centre. At present, CLS settles transactions for 70 institutions (settlement members). In addition, over 35,000 third parties currently settle their foreign exchange transactions by means of CLS.

CLS originally began operations on 9 September 2002 with 39 settlement members and in 7 currencies. It was the banking industry's response to the strategy devised by the G10 central banks to reduce the settlement risk (also referred to as Herstatt risk) attached to foreign currency dealing. Settlement risk refers to the risk that a party to a foreign exchange transaction will pay for a given currency but not then receive the currency it has purchased. Arising during the settlement period, it shares the characteristics of credit and liquidity risk.

CLS settles foreign exchange transactions individually in gross terms. Payments are then settled via national central bank accounts according to the PvP principle by means of real-time payment submissions and deliveries. This occurs on the basis of a pay-in schedule specified by CLS for each individual currency, which is drawn up in observance of payment instructions submitted by participants. This means that a foreign exchange transaction is only settled in CLS if the payments resulting from the transaction can be made simultaneously. As a result, foreign exchange settlement risk is effectively eliminated. Foreign exchange transactions can currently be settled in 18 currencies.

Implementation

As CLS Bank International is located in New York, it is regulated and overseen as an Edge Act corporation by the US Federal Reserve System. However, due to its multi-currency system, CLS is additionally overseen by the multilateral CLS Oversight Committee, which is co-ordinated by the Federal Reserve Bank of New York and comprises the G10 central banks and those central banks whose currencies are settled in CLS. The Eurosystem is represented by the Bundesbank together with the other G10 central banks from the euro area (Nationale Bank van België, Banque de France, Banca d’Italia and De Nederlandsche Bank) and the ECB (the primary overseer of the euro). The Bundesbank's place on the committee enables it to play a role in verifying compliance with international standards and reviewing proposed strategic initiatives (e.g. new currencies, new services etc.).