The Continuous Linked Settlement (CLS) Bank operates the largest multi-currency cash settlement system which eliminates settlement risk caused by FX transactions occurring across time zones for over half the world's foreign exchange payment instructions. CLS settles matched FX trades on a gross payment versus payment (PvP) basis in seventeen currencies that account for 95% of daily traded value. The funding for settlement is required on a multi-laterally netted basis per value date. CLS settles payment instructions related to trades executed in six main instruments: FX spot, FX forwards, FX options, FX swaps, non-deliverable forwards and cash settlements from credit derivatives.

CLS has 63 Settlement Members and over 9,000 third parties: split by value – corporates 3%, NBFIs 7%, Funds 24%, Banks 66%.

CLS settles payment instructions related to underlying transactions in 17 currencies - Mexican peso, Canadian dollar, Pound sterling, Israeli shekel, Japanese yen, Korean won, Danish krone, euro, US dollar, Hong Kong dollar, Singapore dollar, Norwegian krone, Australian dollar, New Zealand dollar, South African rand, Swedish krona, Swiss franc- and certain other transactions that result in one-way payments in a subset of those currencies.

The proof of concept for CLS was the 2008 financial crisis, when the FX market worked, almost without disruption, due to the use of CLS. The crisis highlighted the importance of settlement risk as being the major risk in FX, and how the industry had cooperated to mitigate this risk. More recently CLS has seen increased market awareness due to:

• US Treasury exemption for FX Swaps and Forwards – 2012. (CLS was mentioned 26 times in the final document)
• Basel Committee on Banking Supervision final guidelines which focused on payment vs. payment and is essentially what CLS provides
• increased volatility in 2013 which has driven market growth.

Corporate Benefits
Corporate users are the large trading organisations such as Google, HP, Microsoft, Nike, Nokia, SKF, Total, Vodafone and Volvo. The main benefits for corporates are:

• reduced settlement risk (some corporates feel CLS eliminates settlement risk altogether)
• funding efficiency – on average CLS nets pay-ins to only 4% of the total value
• credit efficiency – many organisations reduce the credit allocated to trades that settle in CLS (because settlement risk is mitigated)
• CLS acts as a central hub for crisis and failure management.

One corporate CLS user, "The process is managed by our lead bank.  It runs seamlessly in the background and there have never been any issues."

Drawbacks
Very few. Most corporate FX groups are happy with the system and would not change anything. Although there are some currencies that it might not be worth settling using this process due to cut-off times, e.g. cut off time for releasing JPY is the day before USD which is earlier than would be the norm, but if the corporate wanted the absence of settlement risk, etc. it still works.