Overview
This lecture explains how the CLS settlement system works to efficiently and securely process massive daily global foreign exchange (FX) transactions by minimizing risk and managing liquidity through a structured settlement cycle.
CLS Settlement System Overview
- CLS (Continuous Linked Settlement) processes trillions of dollars in FX payment instructions daily.
- Payment instructions are received, matched, and settled simultaneously using a payment-versus-payment system.
- The settlement cycle runs 24 hours a day, five days a week, including bank and national holidays.
- Transactions are netted down multilaterally, reducing funding requirements by about 96%.
- Over 50% of all global FX transactions are processed through CLS.
Daily Settlement Cycle Steps
- 8:00 PM: DTCC cash flow submission window for next settlement day.
- Midnight: Deadline for unilateral resign of instructions and issuance of initial pay-in schedule.
- 1:15 AM: In-and-out swap details become available to members (only 5-7% of volume).
- 6:30 AM: Bilateral resign deadline, revised pay-in schedule, and central bank pay-in reports issued.
- 7:00 AM: Actual settlement process starts; members begin pay-ins.
- 7:00–9:00 AM: Matching and settlement of payment instructions.
- 10:00 AM: Asian Pacific funding completion; priority to Asian currencies before 10:25 AM close.
- 12:00 PM: European and North American funding completion.
- 1:00 PM: Currency close for the day; balances return to zero.
Pay-ins and Payouts
- Members calculate net positions in each currency at set times.
- If a member owes more, they must transfer funds (pay-in) to CLS Bank by the deadline.
- CLS receives all pay-ins, initiates settlement, and then distributes payouts to net receivers.
- Netting reduces gross obligations to a single net amount per currency, enhancing efficiency.
Risk Management and Liquidity
- Spreading pay-ins throughout the morning minimizes liquidity draws and market volatility.
- Settlement is final and irrevocable, reducing settlement risk.
Transaction Splitting
- Large orders are split into smaller blocks to match available liquidity and prevent market disruption.
- This block-splitting ensures efficient, step-by-step settlement and price delivery.
Key Terms & Definitions
- CLS (Continuous Linked Settlement) — A global FX settlement system that mitigates settlement risk and manages liquidity.
- Pay-in — Funds members send to CLS to fulfill net settlement obligations.
- Payout — Funds CLS distributes to members after netting and settlement.
- Netting — Offsetting gross obligations to reduce the amount of money transferred.
- Payment-versus-payment (PvP) — Settlement method where both sides of a transaction are settled simultaneously.
Action Items / Next Steps
- Review diagrams and examples of the CLS settlement cycle for clarity.
- Prepare for the next lecture covering advanced CLS topics.