What is CLS?
CLS, Continuous Linked Settlement, is a system for clearing and settling foreign exchange transactions. In this system leading banks from a number of countries can make payments that have arisen as a result of foreign exchange transactions. The Swedish Krona is included in CLS.
Settlement of foreign exchange transactions can give rise to substantial risks. If the banks trading with one another are in different time zones, there is a risk that one party in a foreign exchange transaction will pay the sold currency without receiving the bought currency. This can occur, for instance, if the counterparty goes bankrupt or during this period suffers payment problems. This was exactly the problem that arose when the German Herstatt bank went bankrupt in the 1970s. This bankruptcy led to considerable liquidity problems for other banks. This risk is therefore known as the Herstatt risk.
CLS, which began operating in 2002, eliminates this risk by executing both stages of a foreign exchange transaction simultaneously. This is achieved by the participants holding accounts – one for each currency – with CLS and by CLS settling both stages of the foreign exchange transaction at the same time. CLS in turn has accounts in the respective participating currencies’ central banks. The net total of the respective member’s transactions is paid in, to or by CLS via the respective country’s central payment system.
Which currencies are included in CLS?
The Swedish Krona is, as of 8 September 2003, one of the currencies included in CLS. The other currencies are the US Dollar, the Australian Dollar, the Canadian Dollar, the Danish Krone, the Euro, the GB Pound, the Hong Kong Dollar, the Israeli Shekel, the Japanese Yen, the Korean Won, the Mexican Peso, the Norwegian Krone, the New Zealand Dollar, the South African Rand, the Singapore Dollar and the Swiss Franc. The total daily turnover in CLS amounts to eight times Sweden’s annual gross domestic product. Sweden’s gross domestic product amounted in 2007 to around SEK 3,000 billion.
The Riksbank and CLS
The Riksbank participates in the CLS cooperation in two ways; by supplying accounts in RIX for settlement of transactions in Swedish kronor, and by participating in the oversight of CLS. The oversight work is carried out in collaboration with the participating currencies’ central banks under the leadership of the Federal Reserve Bank New York.
Follow the links below to read more about CLS.