CLS Group - How IT Works

How It Works

Following an FX transaction, Settlement Members submit payment instructions to CLS. These payment instructions are authenticated and matched by CLS. Payment instructions are maintained by the system until settlement date. The CLS daily settlement cycle operates with settlement and funding occurring during a five-hour window when all real time gross settlement (RTGS) systems in the CLS settlement currency jurisdictions are open and able to make and receive payments. This enables simultaneous settlement of the payments on both sides of a FX transaction.

Each Settlement Member holds a single multicurrency account with CLS. At the start and end of a normal settlement day, each Settlement Member has a zero balance on its account. Under normal operations of the settlement service, CLS starts and ends the day with a zero balance in its central bank accounts and in its Settlement Member accounts. Settlement Members may submit payment instructions relating to their own FX transactions as well as the FX transactions of their third party customers directly to CLS.

CLS holds accounts with each of the central banks whose currencies it settles. CLS, Settlement Members and the national RTGS systems communicate via SWIFT.

On each settlement date, upon determining that the accounts of the submitting Settlement Members satisfy several risk management tests, CLS simultaneously settles each pair of matched payment instructions by making the corresponding debit and credit entries in the Settlement Members’ accounts at CLS. The settlement of the payment instructions and the associated payments are final and irrevocable.

Another key element of the CLS Settlement Service is the liquidity efficiencies delivered through multilateral payment netting. On each day participants will very likely have more than one trade to settle - in practice, major banks will have hundreds or thousands of trades each day. Each day prior to settlement, CLS calculates the funding required of each Settlement Member on a multilateral netted basis. The amount of cash required by CLS to settle all payment instructions is reduced, allowing each Settlement Member to transfer only the net amount of its payment obligations in each currency, rather than the total amount of each trade to be settled. On average, CLS netting efficiency is in the region of 96%.