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CLS (Continuous Linked Settlement) plays a critical role in the global foreign exchange (FX) market, and its focus on mitigating settlement risk and enhancing operational efficiency is central to its mission.
Here’s a breakdown of what makes CLS so important:
* Eliminating Settlement Risk (Herstatt Risk): This is CLS’s primary function. Before CLS, there was a significant risk (known as Herstatt risk) that one party to an FX trade would deliver its currency but not receive the counter-currency, especially due to time zone differences. CLS solves this by operating a “payment-versus-payment” (PvP) system. This means both sides of a foreign exchange transaction are settled simultaneously through CLS Bank International. If one payment fails, the other doesn’t go through either, effectively eliminating principal risk.
* Operational Efficiency:
* Netting: CLS provides multilateral netting of payments. Instead of each individual trade being settled, participants’ obligations across multiple trades are netted down to a single net payment per currency. This significantly reduces the number of payments required and optimizes funding needs for participating financial institutions.
* Standardization and Automation: CLS offers a standardized and automated platform for FX settlement, streamlining processes and reducing manual errors.
* Liquidity Management: By reducing gross payment obligations through netting, CLS also helps participants manage their liquidity more efficiently.
* Expanding Services: CLS has indeed been expanding beyond its core settlement service. Some of its key offerings and areas of expansion include:
* CLSSettlement: The flagship service that provides PvP settlement for 18 actively traded currencies. It settles trillions of dollars in payments daily.
* CLSNet: A bilateral payment netting calculation service that covers a broader range of currencies (including emerging market currencies) and trade types, such as same-day trades and non-deliverable forwards (NDFs). It helps extend netting benefits to trades not eligible for CLSSettlement.
* CLSTradeMonitor: A tool that provides near real-time oversight of all settlement payment instructions, helping investment managers identify and resolve exceptions quickly.
* CLSMarketData: A suite of data products offering insights into FX market dynamics.
* Cross Currency Swaps and OTC Derivatives: CLS is also working to mitigate settlement risk and improve efficiency for these related FX instruments.
* Industry Adoption: CLS was established in 2002 as a response to the G10 central banks’ objective to reduce FX settlement risk. It’s owned by many of the world’s leading financial institutions and has become an industry standard, with a large and growing number of participants, including banks, investment funds, and multinational corporations.
In essence, CLS continues to be a cornerstone of the global FX market, making it safer, more efficient, and more resilient.

Video courtesy of KDPW

Video courtesy of KDPW