Continuous Linked Settlement (CLS) Bank

CLS Bank is a private sector special purpose bank that uses the CLS system to settle payments associated with a foreign exchange (FX) transaction simultaneously.

CLS is designed to eliminate the risk occurring when each leg of certain FX transactions is settled separately, i.e., the payment is made and the corresponding payment is not received. CLS Bank settles payment instructions in the following currencies: Australian Dollar, Canadian Dollar, Danish Krone, Euro, Japanese Yen, Norwegian Krone, Singapore Dollar, Swedish Krona, Swiss Franc, GB Pound, and U.S. Dollar, and is expected to add more currencies over time.

Customers may join CLS Bank as either a Settlement Member or User Member. Settlement members have accounts with CLS Bank and must sponsor User members that do not have such accounts. Any Settlement member or User member may submit payment instructions for settlement processing, but the sponsoring Settlement member must authorize each instruction a User member submits. Non-members may settle their FX payments through private arrangements with members who will submit the settlement processing instructions to the service. Such members are responsible to CLS Bank as principals with respect to such payment instructions.

Payment instructions are settled under the CLS Bank rules when it debits and credits the relevant Settlement members' accounts for the amounts involved. This final settlement will only occur within the context of several risk management tests.The risk management tests are: (1) any Short Position in respect to each currency would not exceed the relevant Settlement Member's Short Position Limit (adjusted based on the committed liquidity facilities available to CLS Bank for that day); (2) the Aggregate Short Position in the Settlement Member's Account, calculated as an equivalent U.S. dollar value, would not exceed the Aggregate Short Position Limit which is set for that Settlement Member; and (3) the sum of the Settlement Member's Long Positions and Short Positions (the "Account Balance"), adjusted by applicable Haircuts (the "Adjusted Account Balance), would not be negative. If any of these tests are not satisfied, no debits or credits will be made, and the pair of Settlement Eligible Instructions will remain on the settlement processing queue and be retested each time the queue is cycled through. The risk management tests will continue to be applied to all Settlement Eligible Instructions on the settlement processing queue until the applicable currency closing time has passed or all Settlement Eligible Instructions on the settlement processing queue have been settled. CLS Bank does not (i) guarantee the settlement of every payment instruction that is submitted for settlement or (ii) become a counterparty to any FX transaction referenced in a payment instruction that is submitted for settlement. In the event that a member is unable to provide its expected pay-in, other CLS members may be obligated to provide revised pay-in requirements.

 

Previous Section
Telex-based Messaging Systems
Next Section
Securities Settlement Systems