CLS (CLS)
CLS is the specialist institution that settles foreign exchange trades between major banks on a payment-versus-payment basis. Launched in 2002 and owned by its member banks, it settles 18 currencies and removes the risk of paying one side of a trade without receiving the other.
Also called: CLS Bank · CLS Bank International · Continuous Linked Settlement · CLSSettlement
CLS stands for Continuous Linked Settlement. It was built by the largest FX-dealing banks, at the urging of central banks, as the industry's answer to Herstatt risk. CLS Bank International is based in New York and supervised by the Federal Reserve, with oversight shared among the central banks whose currencies it settles.
Members submit both sides of each trade. During a daily settlement window, when the major RTGS systems are open at the same time, CLS settles each pair of instructions simultaneously across its own books and holds an account at every relevant central bank. Members fund only their net position in each currency, which reduces the cash needed by well over 90 percent.
CLS settles trillions of dollars a day. Its limits are coverage and access. Many emerging-market currencies are not eligible, direct membership is restricted to large institutions, and trades that need same-day settlement often fall outside its cycle. A payment firm's FX usually reaches CLS, if at all, through the bank it trades with.
In practice
CLS protects the trades settled through it. A deal in a non-CLS currency, or one a bank chooses to settle bilaterally, carries full settlement risk even if both parties are CLS members.
Commonly confused with
| Term | How it differs |
|---|---|
| CHIPS | CHIPS is a US dollar payment system. CLS is a multi-currency settlement service for FX trades that uses national payment systems to move the funds. |
See also
- Payment versus PaymentPayment versus payment (PvP) is a settlement mechanism for foreign exchange in which the final transfer of one currency happens if, and only if, the final transfer of the other currency happens too. It removes the principal risk of paying first.
- Herstatt RiskHerstatt risk is the risk in a foreign exchange trade that one party pays the currency it sold but never receives the currency it bought, because the counterparty fails in between. The full principal amount is at stake.
- Settlement RiskSettlement risk is the risk that a payment or trade does not complete as expected because a party fails to deliver what it owes, on time or at all, after its counterparty has already performed.
- NettingNetting is offsetting mutual obligations so that only the difference actually moves. Two parties that have been paying each other all day settle one payment for the net amount, which cuts both the funds transferred and the liquidity each side must hold to support them.
- RTGSRTGS stands for real-time gross settlement: a system that settles each payment individually and finally in central bank money, rather than offsetting many payments against each other and settling only the difference at the end of a cycle.