Payments Academy
Originally known as Continuous Linked Settlement PAYMENT OPERATIONS STARTED LIVE 01 Originally known as Continuous Linked Settlement - CLS, originally known as ACTIVE 02 Member banks submit their foreign exchange - CLS, fund their net positions QUEUED 03 Settlement date and each currency - CLS calculates each member's net pay QUEUED 04 Window - operating hours of the central banks QUEUED 05 CLS - does not cover every currency or every type QUEUED CLS, originally known as Continuous Linked Settlement, is a global system that provides payment versus payment settlement for foreign exchange trades in eighteen major currencies. Step 1 of 5 Originally known as Continuous Linked Settlement STARTED Originally known as Continuous Linked CLS, originally known as Continuous Linked ACTIVE Member banks submit their foreign exchange CLS, fund their net positions in each QUEUED Settlement date and each currency CLS calculates each member's net pay QUEUED Window operating hours of the central banks QUEUED CLS does not cover every currency or every type QUEUED CLS, originally known as Continuous Linked Settlement, is a global system that provides payment versus payment settlement for foreign exchange trades in eighteen major currencies.
Member banks submit their foreign exchange instructions PAYMENT OPERATIONS IN PROGRESS LIVE 01 Originally known as Continuous Linked Settlement - CLS, originally known as DONE 02 Member banks submit their foreign exchange - CLS, fund their net positions ACTIVE 03 Settlement date and each currency - CLS calculates each member's net pay QUEUED 04 Window - operating hours of the central banks QUEUED 05 CLS - does not cover every currency or every type QUEUED Member banks submit their foreign exchange instructions to CLS, fund their net positions in each currency, and CLS settles both legs of each trade simultaneously on its own books. Step 2 of 5 Member banks submit their foreign exchange instructions IN PROGRESS Originally known as Continuous Linked CLS, originally known as Continuous Linked DONE Member banks submit their foreign exchange CLS, fund their net positions in each ACTIVE Settlement date and each currency CLS calculates each member's net pay QUEUED Window operating hours of the central banks QUEUED CLS does not cover every currency or every type QUEUED Member banks submit their foreign exchange instructions to CLS, fund their net positions in each currency, and CLS settles both legs of each trade simultaneously on its own books.
Settlement date and each currency PAYMENT OPERATIONS IN PROGRESS LIVE 01 Originally known as Continuous Linked Settlement - CLS, originally known as DONE 02 Member banks submit their foreign exchange - CLS, fund their net positions DONE 03 Settlement date and each currency - CLS calculates each member's net pay ACTIVE 04 Window - operating hours of the central banks QUEUED 05 CLS - does not cover every currency or every type QUEUED For each settlement date and each currency, CLS calculates each member's net pay in or pay out, and members fund only the net amount. Step 3 of 5 Settlement date and each currency IN PROGRESS Originally known as Continuous Linked CLS, originally known as Continuous Linked DONE Member banks submit their foreign exchange CLS, fund their net positions in each DONE Settlement date and each currency CLS calculates each member's net pay ACTIVE Window operating hours of the central banks QUEUED CLS does not cover every currency or every type QUEUED For each settlement date and each currency, CLS calculates each member's net pay in or pay out, and members fund only the net amount.
Window: carefully chosen to overlap PAYMENT OPERATIONS IN PROGRESS LIVE 01 Originally known as Continuous Linked Settlement - CLS, originally known as DONE 02 Member banks submit their foreign exchange - CLS, fund their net positions DONE 03 Settlement date and each currency - CLS calculates each member's net pay DONE 04 Window - operating hours of the central banks ACTIVE 05 CLS - does not cover every currency or every type QUEUED This window is carefully chosen to overlap the operating hours of the central banks involved. Step 4 of 5 Window: carefully chosen to overlap IN PROGRESS Originally known as Continuous Linked CLS, originally known as Continuous Linked DONE Member banks submit their foreign exchange CLS, fund their net positions in each DONE Settlement date and each currency CLS calculates each member's net pay DONE Window operating hours of the central banks ACTIVE CLS does not cover every currency or every type QUEUED This window is carefully chosen to overlap the operating hours of the central banks involved.
CLS: single most important piece PAYMENT OPERATIONS COMPLETE LIVE 01 Originally known as Continuous Linked Settlement - CLS, originally known as DONE 02 Member banks submit their foreign exchange - CLS, fund their net positions DONE 03 Settlement date and each currency - CLS calculates each member's net pay DONE 04 Window - operating hours of the central banks DONE 05 CLS - does not cover every currency or every type ACTIVE CLS does not cover every currency or every type of trade Step 5 of 5 CLS: single most important piece COMPLETE Originally known as Continuous Linked CLS, originally known as Continuous Linked DONE Member banks submit their foreign exchange CLS, fund their net positions in each DONE Settlement date and each currency CLS calculates each member's net pay DONE Window operating hours of the central banks DONE CLS does not cover every currency or every type ACTIVE CLS does not cover every currency or every type of trade

Key points of this lesson, in order.

0:00 / 1:50 Step 1 of 5

CLS and Foreign Exchange Settlement

Settlement Risk, Lesson 6 of 7, Narration 1:50, D07 Clearing, settlement and liquidity

Multilateral nettingSettlementLiquidity

What you will learn

Your objective. By the end of this lesson, you will be able to explain CLS and foreign exchange settlement. CLS, originally known as Continuous Linked Settlement, is a global system that provides payment versus payment settlement for foreign exchange trades in eighteen major currencies.

Why it matters. Any business analyst working on cross border payments should understand how CLS fits into the overall flow.

Chapter objective: Learner identifies settlement risk, including Herstatt risk, principal risk, and replacement cost risk, and explains mitigations such as payment versus payment, netting, and limits. Learner demonstrates this skill using realistic banking examples, explaining each step clearly and using correct terminology throughout.

Key learning points

  • Originally known as Continuous Linked Settlement
  • Member banks submit their foreign exchange instructions
  • Settlement date and each currency
  • Window: carefully chosen to overlap
  • CLS: single most important piece

Key terms

Multilateral netting: Netting across many participants in a clearing system, where each participant settles only its net position against the system.

Settlement: The final movement of funds between banks to discharge obligations created by cleared payments. Settlement is usually made in central bank money or through correspondent accounts.

Liquidity: Cash or assets that a bank can use immediately to meet payment obligations. Banks manage liquidity by forecasting inflows and outflows, funding nostro and settlement accounts, and using central bank...

Clearing and settlement timeline showing CLS and Foreign Exchange Settlement.

Practise this lesson

Exercise

Decide which settlement model fits the scenario in this lesson and explain why.

Use the settlement models, the liquidity trade-off and the finality rules in this lesson.

  1. What to do. Name the model, state when settlement becomes final, and explain what happens if the sending bank does not have enough liquidity.

Correct result. Real time gross settlement settles each payment individually in central bank money with immediate finality, but it needs liquidity for every payment. Deferred net settlement nets payments and settles the net position, which needs less liquidity but leaves settlement risk until the net settles.

Why. Settlement is where money actually moves. The model decides the risk, the liquidity need, and when the payment is truly final.

Check your understanding

Practice question

Which of the following best describes CLS and foreign exchange settlement?

Takeaway and next step

What to remember

Any business analyst working on cross border payments should understand how CLS fits into the overall flow.

Settle a payment like the one in this lesson and watch the liquidity and finality behaviour.

Open the T2/TIPS Simulator →

Builds on "Payment Versus Payment".

Transcript and full text

Show transcript

CLS, originally known as Continuous Linked Settlement, is a global system that provides payment versus payment settlement for foreign exchange trades in eighteen major currencies. It is operated by CLS Bank, which is based in New York and regulated by the Federal Reserve, with oversight from the central banks of the currencies it settles. Member banks submit their foreign exchange instructions to CLS, fund their net positions in each currency, and CLS settles both legs of each trade simultaneously on its own books. If a bank does not fund its position, its trades do not settle, and no other bank loses its principal. CLS works on a multilateral netting basis within each currency. For each settlement date and each currency, CLS calculates each member's net pay in or pay out, and members fund only the net amount. This keeps the liquidity requirement manageable, even though the gross value of trades settled through CLS runs into trillions of dollars each day. Settlement takes place during a defined window, typically in the early morning European time, when the payment systems for the relevant currencies are all open. This window is carefully chosen to overlap the operating hours of the central banks involved. The impact of CLS has been profound. Before CLS, banks faced Herstatt risk on every foreign exchange trade, and they managed it with bilateral limits that constrained trading. After CLS, principal risk on covered trades was effectively eliminated, which allowed the foreign exchange market to grow far larger and more liquid. CLS does not cover every currency or every type of trade, and it does not eliminate replacement cost risk or liquidity risk, but it is the single most important piece of infrastructure for managing foreign exchange settlement risk. Any business analyst working on cross border payments should understand how CLS fits into the overall flow. Take a EUR/USD trade of EUR 10 million against USD 10.8 million, agreed on Monday for settlement on Wednesday. On Wednesday morning, both banks submit their instructions to CLS. CLS calculates each member's net pay-in for each currency. The euro seller must pay in EUR 10 million and the dollar seller must pay in USD 10.8 million, but because both banks have many trades that day, their net pay-ins are much smaller, perhaps EUR 2 million and USD 3 million. The banks fund those net amounts into CLS between 07:00 and 09:00 Central European Time, CLS checks that both sides are funded, and then settles both legs simultaneously on its own books, so neither bank is exposed to the other for even a second. If a member fails to pay in, CLS holds the trades and the other members are protected. The short member has until a defined deadline to fund, and if it still cannot, CLS uses its in/out swaps to exchange the currencies it needs, so that the funded members still settle on time. The failing member faces a liquidity shortfall, a penalty, and a report to its regulator, but the other members lose nothing on principal. The risk that remains is liquidity risk: a bank that expected to receive dollars at 09:00 and does not receive them until the afternoon must fund its own payments in the meantime, which is why CLS members keep intraday credit lines ready on settlement days. A BA working on foreign exchange settlement should know the CLS timetable by heart, because it drives the nostro funding schedule. Instructions must be submitted by the CLS cut-off, pay-ins must be funded before the settlement window, and any trade that misses the cut-off settles outside CLS, which means it carries principal risk again. Requirements cover the submission format, the pay-in schedule, the reconciliation of CLS statements against the bank's own records, and the exception process when a trade is held. The BA should also know which currencies and which trade types CLS covers, because a trade in a currency CLS does not settle, or a trade type it does not cover, needs a different risk control, usually a bilateral limit.

CLS, originally known as Continuous Linked Settlement, is a global system that provides payment versus payment settlement for foreign exchange trades in eighteen major currencies. It is operated by CLS Bank, which is based in New York and regulated by the Federal Reserve, with oversight from the central banks of the currencies it settles. Member banks submit their foreign exchange instructions to CLS, fund their net positions in each currency, and CLS settles both legs of each trade simultaneously on its own books. If a bank does not fund its position, its trades do not settle, and no other bank loses its principal.

CLS works on a multilateral netting basis within each currency. For each settlement date and each currency, CLS calculates each member's net pay in or pay out, and members fund only the net amount. This keeps the liquidity requirement manageable, even though the gross value of trades settled through CLS runs into trillions of dollars each day. Settlement takes place during a defined window, typically in the early morning European time, when the payment systems for the relevant currencies are all open. This window is carefully chosen to overlap the operating hours of the central banks involved.

The impact of CLS has been profound. Before CLS, banks faced Herstatt risk on every foreign exchange trade, and they managed it with bilateral limits that constrained trading. After CLS, principal risk on covered trades was effectively eliminated, which allowed the foreign exchange market to grow far larger and more liquid. CLS does not cover every currency or every type of trade, and it does not eliminate replacement cost risk or liquidity risk, but it is the single most important piece of infrastructure for managing foreign exchange settlement risk. Any business analyst working on cross border payments should understand how CLS fits into the overall flow.

Take a EUR/USD trade of EUR 10 million against USD 10.8 million, agreed on Monday for settlement on Wednesday. On Wednesday morning, both banks submit their instructions to CLS. CLS calculates each member's net pay-in for each currency. The euro seller must pay in EUR 10 million and the dollar seller must pay in USD 10.8 million, but because both banks have many trades that day, their net pay-ins are much smaller, perhaps EUR 2 million and USD 3 million. The banks fund those net amounts into CLS between 07:00 and 09:00 Central European Time, CLS checks that both sides are funded, and then settles both legs simultaneously on its own books, so neither bank is exposed to the other for even a second.

If a member fails to pay in, CLS holds the trades and the other members are protected. The short member has until a defined deadline to fund, and if it still cannot, CLS uses its in/out swaps to exchange the currencies it needs, so that the funded members still settle on time. The failing member faces a liquidity shortfall, a penalty, and a report to its regulator, but the other members lose nothing on principal. The risk that remains is liquidity risk: a bank that expected to receive dollars at 09:00 and does not receive them until the afternoon must fund its own payments in the meantime, which is why CLS members keep intraday credit lines ready on settlement days.

A BA working on foreign exchange settlement should know the CLS timetable by heart, because it drives the nostro funding schedule. Instructions must be submitted by the CLS cut-off, pay-ins must be funded before the settlement window, and any trade that misses the cut-off settles outside CLS, which means it carries principal risk again. Requirements cover the submission format, the pay-in schedule, the reconciliation of CLS statements against the bank's own records, and the exception process when a trade is held. The BA should also know which currencies and which trade types CLS covers, because a trade in a currency CLS does not settle, or a trade type it does not cover, needs a different risk control, usually a bilateral limit.

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