Continuous Linked Settlement (CLS)

Continuous Linked Settlement (CLS) is a global settlement system that provides risk mitigation and liquidity management services for foreign exchange (FX) transactions. It was established in 2002 to address the settlement risk associated with FX trades.

CLS acts as a central counterparty for participating banks and financial institutions, ensuring that both sides of an FX trade are settled simultaneously and in a secure manner. This eliminates the risk of one party fulfilling its payment obligations while the other party fails to do so, known as settlement risk or Herstatt risk.

The CLS system operates on a real-time gross settlement (RTGS) basis, which means that each individual trade is settled on a gross basis, in real-time, and with finality. This ensures that once a trade is matched and confirmed, the settlement is irrevocable and cannot be reversed.

To participate in CLS, financial institutions must become CLS members and meet certain eligibility criteria. CLS members submit their FX trades to the system, which then matches and nets the trades to reduce the overall settlement obligations. The system also provides participants with access to liquidity through its network of settlement members, allowing them to efficiently manage their funding needs.

In addition to mitigating settlement risk, CLS also plays a crucial role in liquidity management for the FX market. It provides access to intraday liquidity, allowing participants to optimize their use of funds and manage their cash flows more effectively. This helps to enhance market stability and reduce systemic risk.

CLS operates with a wide range of currency pairs, including major, minor, and emerging market currencies. It settles approximately 50% of the global FX market’s daily volume, which amounts to trillions of dollars.

Overall, CLS has significantly improved the safety and efficiency of FX settlement by reducing settlement risk and providing access to liquidity. It has become an essential infrastructure for the global FX market, enhancing market stability and reducing the potential for financial disruptions.