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This system is significantly different from the payment systems that we have discussed above. It is designed to settle currency exchange transactions in the Forex (FX) market and provides for these transactions in the PVP mode - "payment versus payment".
The fact is that due to the presence of time zones and differences in the operating time of currency exchanges in different countries of the world, significant gaps arise between the transfer of one currency and the counter delivery of another currency. The presence of two stages in the fulfillment of obligations under the transaction generates the risk of violation of obligations by one of the parties, which is fraught with significant losses. With the steady growth in the volume of currency exchange transactions in Forex, these settlement risks pose a great danger.
An example is the case of the German bank Herstatt. In the 1960s-1970s, this bank was actively involved in foreign exchange trading. On June 26, 1974, the bank was revoked its license. But on the eve of this day, the bank concluded a number of deals for the supply of US dollars. Its counterparties transferred the required amounts in German marks in accordance with the terms of operations, but due to the cancellation of the license, the bank was unable to fulfill its obligations to supply dollars. The damage amounted to $ 200 million. This case went down in banking history under the name "Herstatt Risk" as a synonym for calculated risk in Forex.
In subsequent years, the world banking community has been intensively seeking multilateral clearing to minimize settlement risks on foreign exchange conversion transactions. In the report of the Bank for International Settlements "Settlement risk in foreign exchange transactions" (1996), a group of international experts came to the conclusion that the only acceptable solution is the scheme of simultaneous and interconnected supply of currencies by the parties to the transaction in the PvP mode. A number of international banks active in Forex have initiated the creation of the CLS to carry out these settlements.
CLS (Continuous Linked Settlement) acts as a trustee in currency transactions. Counterparties participating in the CLS do not deliver currency directly to each other, but to the CLS clearinghouse, which then (i.e. after receiving the currency from each participant) simultaneously transfers it to their accounts. If one of the counterparties did not deliver the currency on time, then the already made transfer of the other participant, who completed his part of the transaction on time, will be returned.
There are three groups of participants in CLS. These are, firstly, settlement members - shareholders who have multicurrency accounts in CLS and submit payment instructions directly to the CLS settlement center. Another group - users (user members) - acts through the calculated members. Their payments are subject to authorization by the latter. Finally, the third party members - there are more than 2400 of them - are clients of the first two groups.
The CLS clearing center is connected to the RTGS of those countries whose currencies are involved in settlements. The so-called “nostro” agents also participate in the settlement system. banks that provide currency to those CLS members for which this currency is not national. For example, a Japanese bank, acting as a nostro agent, will lend yen to a French bank to sell for US dollars.
Operations to regulate transactions begin on the day of payment at 6:30 am CET. The system calculates the net position of each participant in each currency and prepares a schedule for closing short positions with the exact time of payment. The system monitors the receipt of funds and settles the transaction by transferring funds to the accounts of participants with a long position.
To manage the CLS risk, a short position limit is set for each settlement member for each currency. In addition, the total amount of the net surplus is established by adding up all positions of a given member for all currencies denominated in US dollars. This amount must always be positive. This condition allows CLS members to cover their short positions in some currencies with long positions in others.
With the CLS in place, settlement risks were kept to a minimum. The previously existing time gap between the opening of the Asian and Pacific currency exchanges, on the one hand, and the North American ones, on the other, has been reduced from 24 hours to 5 hours. Thanks to multilateral clearing, deposit requirements for covering short positions have been reduced to 3% of the total amount calculations.
In 2007, CLS settled 492,000 instructions worth $ 3.8 trillion on a daily basis. Transactions are made in 15 currencies: American, Canadian, Australian, Hong Kong and Singapore dollar, euro, pound> 'sterling, Japanese yen, Swiss franc and other Scandinavian and Asian currencies. CLS has become the main currency settlement center for spot, FX options and swaps [CLS Bank International, 2007].
The fact is that due to the presence of time zones and differences in the operating time of currency exchanges in different countries of the world, significant gaps arise between the transfer of one currency and the counter delivery of another currency. The presence of two stages in the fulfillment of obligations under the transaction generates the risk of violation of obligations by one of the parties, which is fraught with significant losses. With the steady growth in the volume of currency exchange transactions in Forex, these settlement risks pose a great danger.
An example is the case of the German bank Herstatt. In the 1960s-1970s, this bank was actively involved in foreign exchange trading. On June 26, 1974, the bank was revoked its license. But on the eve of this day, the bank concluded a number of deals for the supply of US dollars. Its counterparties transferred the required amounts in German marks in accordance with the terms of operations, but due to the cancellation of the license, the bank was unable to fulfill its obligations to supply dollars. The damage amounted to $ 200 million. This case went down in banking history under the name "Herstatt Risk" as a synonym for calculated risk in Forex.
In subsequent years, the world banking community has been intensively seeking multilateral clearing to minimize settlement risks on foreign exchange conversion transactions. In the report of the Bank for International Settlements "Settlement risk in foreign exchange transactions" (1996), a group of international experts came to the conclusion that the only acceptable solution is the scheme of simultaneous and interconnected supply of currencies by the parties to the transaction in the PvP mode. A number of international banks active in Forex have initiated the creation of the CLS to carry out these settlements.
CLS (Continuous Linked Settlement) acts as a trustee in currency transactions. Counterparties participating in the CLS do not deliver currency directly to each other, but to the CLS clearinghouse, which then (i.e. after receiving the currency from each participant) simultaneously transfers it to their accounts. If one of the counterparties did not deliver the currency on time, then the already made transfer of the other participant, who completed his part of the transaction on time, will be returned.
There are three groups of participants in CLS. These are, firstly, settlement members - shareholders who have multicurrency accounts in CLS and submit payment instructions directly to the CLS settlement center. Another group - users (user members) - acts through the calculated members. Their payments are subject to authorization by the latter. Finally, the third party members - there are more than 2400 of them - are clients of the first two groups.
The CLS clearing center is connected to the RTGS of those countries whose currencies are involved in settlements. The so-called “nostro” agents also participate in the settlement system. banks that provide currency to those CLS members for which this currency is not national. For example, a Japanese bank, acting as a nostro agent, will lend yen to a French bank to sell for US dollars.
Operations to regulate transactions begin on the day of payment at 6:30 am CET. The system calculates the net position of each participant in each currency and prepares a schedule for closing short positions with the exact time of payment. The system monitors the receipt of funds and settles the transaction by transferring funds to the accounts of participants with a long position.
To manage the CLS risk, a short position limit is set for each settlement member for each currency. In addition, the total amount of the net surplus is established by adding up all positions of a given member for all currencies denominated in US dollars. This amount must always be positive. This condition allows CLS members to cover their short positions in some currencies with long positions in others.
With the CLS in place, settlement risks were kept to a minimum. The previously existing time gap between the opening of the Asian and Pacific currency exchanges, on the one hand, and the North American ones, on the other, has been reduced from 24 hours to 5 hours. Thanks to multilateral clearing, deposit requirements for covering short positions have been reduced to 3% of the total amount calculations.
In 2007, CLS settled 492,000 instructions worth $ 3.8 trillion on a daily basis. Transactions are made in 15 currencies: American, Canadian, Australian, Hong Kong and Singapore dollar, euro, pound> 'sterling, Japanese yen, Swiss franc and other Scandinavian and Asian currencies. CLS has become the main currency settlement center for spot, FX options and swaps [CLS Bank International, 2007].
