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CLS, or Continuous Linked Settlement, offers settlement of FX transactions in US, Canadian, Australian, New Zealand, Singapore and Hongkong dollar; euros, pounds sterling, Swiss francs and Japanese yen, Korean won, South African rand and Danish and Norwegian kroner and Swedish kronor. With the encouragement of the central banks CLS was established by the world’s largest banks with the objective of reducing the settlement risk on foreign-exchange transactions.
Traditionally, foreign-exchange transactions are settled via the usual international payment channels. The parties to a trade hereby assume a settlement risk since there is no guarantee of receipt of the purchased currency even if the sold currency has been delivered. This risk is particularly apparent if the two currency brokeres originate from different corners of the globe, and therefore do not necessarily share the same banking hours.
Foreign-exchange transactions are settled in CLS by the payment-versus-payment principle. Both parties to a transaction report their trading instructions to CLS, which hereafter ensures that funds are not paid to either of the parties until both have paid in the agreed amount. To ensure cover for the amounts, all payments must take place via the central banks for the participating countries’ currencies.
The central banks in question all have rules stipulating that accounts cannot be drawn on unless the required cover is in place.
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