CLS, Continuous Linked Settlement, is a system for clearing and settling foreign exchange transactions where leading banks from a number of countries can make payments that arise from such transactions. The Swedish krona is included in CLS.
The purpose of CLS is to eliminate the foreign exchange risks that arise when payments in an international foreign exchange transaction between commercial banks are not made simultaneously.
Traditionally, delivery of the various payment flows, or currency legs, in foreign exchange payments have been made at different times, as settlement in the national payment systems is governed by the time zones in which they are located. In other words, during a foreign exchange transaction a bank may have to supply a currency before delivery of the opposite currency in the transaction. If the payments of the different legs are made at different times, there is always a risk that the counter-payment will not be made, for instance because the counterparty defaults or encounters payment problems in the interim. This was exactly the problem that arose when the German Herstatt bank went bankrupt in the 1970s. The bankruptcy led to considerable liquidity problems for other banks. This risk is therefore known as Herstatt risk.
CLS, which began operating in 2002, eliminates this risk by executing both legs of a foreign exchange transaction simultaneously. This is achieved by the leading commercial banks holding accounts – one for each currency – with CLS and by CLS settling both legs of the foreign exchange transaction at the same time. It is this simultaneity that reduces the risks. CLS in turn has accounts in the respective central banks of the participating currencies. The net total of each member's transactions is paid in to or out by CLS via the respective country’s central payment system.
The Swedish krona has been included in CLS since 8 September 2003. The total daily turnover in CLS amounted to USD 1,819 billion in January 2005. This daily amount is five times Sweden’s annual gross domestic product, GDP.
The Riksbank participates in the CLS cooperation in two ways: by providing accounts in RIX for settlement of transactions in Swedish kronor, and by participating in the oversight of CLS.