Continuous linked settlement
Encyclopedia
Continuous Linked Settlement is a process by which a number of the world's largest bank
s manage settlement
of foreign exchange
amongst themselves (and their customers and other third-parties). The process is managed by CLS Group Holdings AG and its subsidiary companies and include CLS Bank, a settlement bank regulated by the Federal Reserve Bank of New York
. The Group was formed in 1997 and the settlement system has been operational since 2002. , there were 73 shareholders and 62 settlement members as well as 4,576 Third Party participants (411 banks, corporates and non-bank financial institution
s and 4,165 investment funds) that participate in the system.
CLS Bank settles transactions on a payment versus payment basis, also known as PVP. When a foreign exchange trade is settled, each of the two parties to the trade pays funds in one currency and receives funds in a different currency. PVP ensures that these payments and receipts happen simultaneously. CLS Bank acts as the common counterparty between all participating banks; each party is required to have the funds it is to pay out deposited with CLS Bank in the hours before settlement occurs. CLS settles payments by debiting the settling party's accounts at CLS in the amount the party owes and simultaneously crediting the party's account with the foreign currency amount is it to receive. Settlement generally takes place during a five-hour window when all the relevant real-time gross settlement (RTGS) systems are open and able to make and receive payments. Because the clearing
occurs in advance of settlement, settlement is on a real-time net basis.
Without PVP there is a (potentially devastating) chance that one party could pay its leg of the transaction to the other, but never receive the reciprocal payment (which could happen if the other institution defaults in the hours between receipt of one leg and payment of the other). This is known as settlement risk
, or Herstatt risk.
A key feature of CLS is the settlement of gross-value instructions with multi-lateral net funding. On most days most participants will have more than one trade to settle - in practice, major banks will have hundreds or thousands of trades each day. Multi-lateral net funding allows each settling bank to transfer only the net amount of its payment obligations in each currency, rather than the total amount of each trade to be settled. On average, CLS netting efficiency is in the region of 95%; that is to say, each trillion dollars of gross value settled might require aggregate pay-ins of "only" $50 billion.
Since it began operations, CLS has rapidly become the market-standard for foreign exchange settlement between major banks. On September 21 2011, it settled a record 1,960,492 instructions a day in 17 currencies (which represent some 95% of global foreign exchange trading). These instructions contained a gross value of approximately US$ 8.9 trillion. This new record exceeded the previous record for number of instructions settled of 1,936,790 on November 26, 2010.
The single day record for gross-value settlement, set on 19 March 2008, stands at US$ 10.3 trillion, for 1,113,464 payment instructions.
An additional benefit of the CLS system is the increased straight through processing
capabilities.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s manage settlement
Settlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
of foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
amongst themselves (and their customers and other third-parties). The process is managed by CLS Group Holdings AG and its subsidiary companies and include CLS Bank, a settlement bank regulated by the Federal Reserve Bank of New York
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
. The Group was formed in 1997 and the settlement system has been operational since 2002. , there were 73 shareholders and 62 settlement members as well as 4,576 Third Party participants (411 banks, corporates and non-bank financial institution
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
s and 4,165 investment funds) that participate in the system.
CLS Bank settles transactions on a payment versus payment basis, also known as PVP. When a foreign exchange trade is settled, each of the two parties to the trade pays funds in one currency and receives funds in a different currency. PVP ensures that these payments and receipts happen simultaneously. CLS Bank acts as the common counterparty between all participating banks; each party is required to have the funds it is to pay out deposited with CLS Bank in the hours before settlement occurs. CLS settles payments by debiting the settling party's accounts at CLS in the amount the party owes and simultaneously crediting the party's account with the foreign currency amount is it to receive. Settlement generally takes place during a five-hour window when all the relevant real-time gross settlement (RTGS) systems are open and able to make and receive payments. Because the clearing
Clearing
Clearing may refer to:* Glade , a tract of land with few or no trees in the middle of a wooded area* Deforestation, the clearing away of trees to make farmland* Clearing , the process of settling a transaction after committing to it...
occurs in advance of settlement, settlement is on a real-time net basis.
Without PVP there is a (potentially devastating) chance that one party could pay its leg of the transaction to the other, but never receive the reciprocal payment (which could happen if the other institution defaults in the hours between receipt of one leg and payment of the other). This is known as settlement risk
Settlement risk
Settlement risk is the risk that a counterparty does not deliver a security or its value in cash per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value per the trade agreement....
, or Herstatt risk.
A key feature of CLS is the settlement of gross-value instructions with multi-lateral net funding. On most days most participants will have more than one trade to settle - in practice, major banks will have hundreds or thousands of trades each day. Multi-lateral net funding allows each settling bank to transfer only the net amount of its payment obligations in each currency, rather than the total amount of each trade to be settled. On average, CLS netting efficiency is in the region of 95%; that is to say, each trillion dollars of gross value settled might require aggregate pay-ins of "only" $50 billion.
Since it began operations, CLS has rapidly become the market-standard for foreign exchange settlement between major banks. On September 21 2011, it settled a record 1,960,492 instructions a day in 17 currencies (which represent some 95% of global foreign exchange trading). These instructions contained a gross value of approximately US$ 8.9 trillion. This new record exceeded the previous record for number of instructions settled of 1,936,790 on November 26, 2010.
The single day record for gross-value settlement, set on 19 March 2008, stands at US$ 10.3 trillion, for 1,113,464 payment instructions.
An additional benefit of the CLS system is the increased straight through processing
Straight Through Processing
Straight-through processing enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions...
capabilities.
Currencies
CLS currently trades the following currencies:| Country/Entity | Symbol | Currency |
|---|---|---|
 Australia |
AUD | Australian Dollar Australian dollar The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu... |
 Canada |
CAD | Canadian Dollar Canadian dollar The Canadian dollar is the currency of Canada. As of 2007, the Canadian dollar is the 7th most traded currency in the world. It is abbreviated with the dollar sign $, or C$ to distinguish it from other dollar-denominated currencies... |
 Denmark |
DKK | Danish Krone Danish krone The krone is the official currency of the Kingdom of Denmark consisting of Denmark, the Faroe Islands and Greenland. It is subdivided into 100 øre... |
 EurozoneEurozone The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender... |
EUR | Euro Euro The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,... |
 Hong Kong |
HKD | Hong Kong Dollar Hong Kong dollar The Hong Kong dollar is the currency of the jurisdiction. It is the eighth most traded currency in the world. In English, it is normally abbreviated with the dollar sign $, or alternatively HK$ to distinguish it from other dollar-denominated currencies... |
 Israel |
ILS | Israeli new shekel |
 Japan |
JPY | Japanese Yen Japanese yen The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling... |
 Mexico |
MXN | Mexican Peso Mexican peso The peso is the currency of Mexico. Modern peso and dollar currencies have a common origin in the 15th–19th century Spanish dollar, most continuing to use its sign, "$". The Mexican peso is the 12th most traded currency in the world, the third most traded in the Americas, and by far the most... |
 New Zealand |
NZD | New Zealand Dollar New Zealand dollar The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents.... |
 Norway |
NOK | Norwegian Krone Norwegian krone The krone is the currency of Norway and its dependent territories. The plural form is kroner . It is subdivided into 100 øre. The ISO 4217 code is NOK, although the common local abbreviation is kr. The name translates into English as "crown"... |
 Singapore |
SGD | Singapore Dollar Singapore dollar The Singapore dollar or Dollar is the official currency of Singapore. It is normally abbreviated with the dollar sign $, or alternatively S$ to distinguish it from other dollar-denominated currencies... |
 South Africa |
ZAR | South African Rand South African rand The rand is the currency of South Africa. It takes its name from the Witwatersrand , the ridge upon which Johannesburg is built and where most of South Africa's gold deposits were found. The rand has the symbol "R" and is subdivided into 100 cents, symbol "c"... |
 South Korea |
KRW | South Korean Won South Korean won The won is the currency of South Korea. A single won is divided into 100 jeon, the monetary subunit. The jeon is no longer used for everyday transactions, and appears only in foreign exchange rates... |
 Sweden |
SEK | Swedish Krona Swedish krona The krona has been the currency of Sweden since 1873. Both the ISO code "SEK" and currency sign "kr" are in common use; the former precedes or follows the value, the latter usually follows it, but especially in the past, it sometimes preceded the value... |
 Switzerland |
CHF | Swiss Franc Swiss franc The franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there... |
 United Kingdom |
GBP | Pound Sterling Pound sterling The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence... |
 United States |
USD | United States Dollar United States dollar The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies.... |
See also
- Clearing (finance)Clearing (finance)In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
- Bank for International SettlementsBank for International SettlementsThe Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
- delivery versus paymentDelivery versus payment"Payment at the moment of delivery".Delivery versus payment or DVP is a sale transaction of negotiable securities that can be instructed to a settlement agent using SWIFT Message Type MT 543...