The CLSTM system: reducing settlement risk in foreign exchange transactions.

Abstract

The launch of the CLSTM system on 9 September 2002 marked the completion of an ambitious project undertaken by the banking sector following the G10 central banks’ recommendations on reducing settlement risk in foreign exchange transactions. The CLS system is owned by 66 of the largest foreign exchange-dealing banks, including 4 French banks. In the first phase, 7 currencies (euro, US dollar, sterling, yen, Swiss franc, Canadian dollar and Australian dollar) will be eligible for CLS. The system is bound to establish itself as the standard “market infrastructure” for settling foreign exchange transactions. The first section of this article looks at the CLS system in light of the central banks’ joint efforts with the banking industry to reduce settlement risk in foreign exchange transactions. The second section describes the CLS operating principles and its contribution to controlling settlement risk. The third section discusses the central banks’ role in the oversight of the CLS project. The final section looks at the impact that the implementation of the system may have on payment activities.