CLS, or continuous linked settlement, is a cross-border payment system for the settlement of foreign exchange trades that eliminates settlement risk.
Standard foreign exchange transactions involve a settlement risk. As the exchange of the two currencies involved is not simultaneous, the party that sells a currency before receiving the currency purchased from the counterparty is exposed to a certain risk.
CLS removes settlement risk by using a payment-versus-payment mechanism (“PVP”). This means that you get paid only if you pay.
On settlement day, each counterparty to the trade pays to continuous linked settlement the currency it is selling. CLS pays out the bought currency only if the sold currency is received.
In effect, continuous linked settlement acts as a trusted third party in the settlement process. It’s important to note that CLS is not a central counterparty, the trade remains between the two counterparties.
The CLS system is run by CLS Bank International, which is solely dedicated to settling foreign exchange trades. The CLS Bank was established in 2002 and is owned by the world’s largest banks. CLS Bank (CLS) is a limited purpose bank for settling FX, based in New York with its main operations in London.
While the CLS Bank is based in New York, it maintains accounts in the various countries in whose currencies it settles trades. All transactions are settled through the bank in a single 5-hour window during each business day.
Today, CLS settles payment instructions in 18 currencies for 70+ settlement members and over 25,000 third-party customers. CLS settles $5.3 trillion of payments on an average day.
It is regulated and supervised by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.