CLS operates a global multicurrency cash settlement system through which settlement risk can be mitigated with finality.
CLS uses a unique combination of payment versus payment settlement over CLS central bank accounts, real time gross settlement (RTGS) systems and multilateral payment netting supported by a robust and resilient infrastructure.
The Settlement Service:
- Mitigates FX settlement risk in the world’s single largest market
- Settles payment instructions relating to transactions in 18 currencies and executed in the following instruments: FX spot, FX forward, FX swap and OTC credit derivatives
- Is available directly (Settlement Members) or indirectly (through Settlement Members providing access to third parties) to FX market participants
In addition to CLS’s primary purpose of mitigating settlement risk, the service has delivered liquidity and operational efficiencies for its Members:
Liquidity Efficiencies Through Multilateral Netting
Each day prior to settlement in each currency, CLS calculates the funding required of each Settlement Member on a multilateral netted basis for each currency, after taking into consideration all payment instructions of the Settlement Member that are due to settle that day in that currency. The amount of cash required by CLS to settle all payment instructions is reduced by an average of 96%. This means that for every USD 1 trillion of value settled, the CLS community has to fund less than USD 50 billion in cash.
This is further reduced by the use of an additional liquidity management tool - the In/Out Swap service. On average, In/Out Swaps reduce payment obligations in CLS by 75%, which results in a funding requirement in CLS of less than 1% of the total gross settlement value.
Operational Efficiencies Through Automation
The settlement service maximizes the benefits of straight-through processing and minimizes operational errors and their associated costs. Real-time information on the status of payment instructions is provided to, and therefore easily monitored by, Settlement Members. Unmatched payment instructions can be followed up promptly and corrections made as necessary before settlement.